McLaughlin & Stern LLP
260 Madison Avenue
New York, New York 10016
August 8, 1997
Securities and Exchange Commission
450 Fifth St., N.W.
Washington, DC 20549
Re: Arthur Treacher's Inc. - Form 10SB
CIK: 0001016951
Dear Sirs:
We are writing in response to the comments of Mr. Cascio in our telephone
conversation of August 8, 1997. The Amendment No. 3 to the Form 10SB filed in
connection herewith has been marked to show changes from the previous filing.
1. On page F-7, the disclosure regarding the "Purchase of subsidiary" has
been clarified to show that the cash used for the purchase is net of the
$471,784 in cash acquired from MIE. In addition, the $618,437 portion of the
purchase price of $2,250,000, which was used to pay assumed debt as disclosed in
Note 3, has been moved from the classification of "Principal payments on long
term debt" to "Purchase of subsidiary." The sum of the $1,778, 216 allocated for
the "Purchase of subsidiary" and the $471,784 equals the $2,250,000 purchase
price disclosed in Note 3.
2. The correction has been made to the notes on page F-13.
3. Clarification has been provided in the Note 6 regarding the income tax
benefit on page F-28 and Note 7 on page F- 45.
1
<PAGE>
4. The discussion on page F-31 has been expanded to include "liquidity and
operating results."
5. The Statement of Retained Earnings (Deficit) has been revised on page F-
65.
6. The headings on page F-66 have ben revised as requested.
7. The heading on page F-67 has been revised as requested.
Please do not hesitate to contact me with any additional questions. We
appreciate your prompt review of this filing. As previously discussed, we are
seeking your final approval by August 14, 1997 as audited financial statements
for the fiscal year ended June 30, 1997 would be required after such date.
Sincerely,
/s/Steven Schuster
Steven Schuster
cc: Christina Chalk
Brian Cascio
steven\treacher\letters\sec.88
2
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
AMENDMENT NO. 3
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL BUSINESS ISSUERS Under
Section 12(B) or 12(G) of the Securities Act of 1934
ARTHUR TREACHER'S, INC.
(Name of Small Business Issuer in Its Charter)
UTAH 34-1413104
(State or Other Jurisdiction of Incorporation or Organization)(I.R.S. Employer
Identification No.)
7400 Baymeadows Way, Suite 300, Jacksonville, Florida 32256
(Address of Principal Executive Offices) (Zip Code)
(904) 739-1200
(Issuer's Telephone Number)
Securities to be registered under Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which
to be so Registered Each Class is to be Registered
Securities to be registered under Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
1
<PAGE>
PART I
Item 1. Description of Business.
The Company is a fast service seafood restaurant chain based in Jacksonville,
Florida. The Company's principal business is the operation of Company owned
stores and the sale of franchises of "Arthur Treacher's Fish & Chips" fast food
restaurants. The Company has 117 restaurants in the Arthur Treacher's system,
consisting of 64 Company owned restaurants and 53 independently owned and
operated franchised locations. The restaurants are located in 12 states in the
mid-western and eastern United States as well as in Washington D.C. and the
province of Ontario, Canada.
(A) Background
The Company was originally founded in 1969 as Arthur Treacher's Fish & Chips,
Inc., a Delaware corporation. The Company operated a network of franchised and
Company owned restaurants in the United States and Canada. The Company's main
product was its "Original Fish & Chips" product consisting of two fish fillets
coated with a special batter prepared under a proprietary formula, deepfried
golden brown and served with English-style chips and two corn meal "hush
puppies." The Company's other products included an assortment of other fried and
grilled seafood combination dishes including shrimp, clams and chicken.
In 1979, Mrs. Paul's, Inc. ("Mrs. Paul's") purchased Arthur Treacher's Fish &
Chips, Inc. Mrs. Paul's changed the products offered at the restaurants, which
resulted in severe dissatisfaction among the franchisees, a reduction in the
number of restaurants and litigation between certain franchisees and Mrs.
Paul's. In 1982, Lumara Foods of America, Inc. ("Lumara") acquired the assets of
Arthur Treacher's Fish & Chips, Inc. from Mrs. Paul's. Lumara was unable to
achieve profitability and consequently sought bankruptcy protection in 1983. In
December 1983, Arthur Treacher's Inc., an Ohio corporation, entered into an
agreement to purchase the assets of Lumara, during Chapter XI bankruptcy
proceedings. In February 1984, Arthur Treacher's Inc., an Ohio corporation,
merged into El Charro, Inc., a Utah corporation, which consummated the
acquisition of the assets of Lumara and changed its name to Arthur Treacher's,
Inc.
The Company reduced its size from approximately 200 to 117 stores between 1984
and 1997, primarily through a net reduction from more than 180 franchised
locations to 95 franchised locations, under the management of President and
principal shareholder, James R. Cataland. In 1984, only 74 of the more than 180
franchised locations were in good standing. The franchise network was rebuilt
and expanded in the early 1990's under the management of Mr. Cataland.
In 1993, three investors, including Mr. Bruce R. Galloway, the current Chairman
of the Board of the Company, and Mr. Fred Knoll, a Director designee of the
Company, acquired from the Company an aggregate of 2,000,000 shares of Common
Stock for $1,000,000. On May 31, 1996, an investor group organized by Mr.
Galloway acquired control of the Company through the purchase of an additional
2,000,000 shares from the then principal shareholder and President, Mr.
Cataland.
2
<PAGE>
Contemporaneously with such acquisition, Mr. R. Frank Brown became
President, Chief Executive Officer and Treasurer of the Company, and the current
Board of Directors was elected.
Under Mr. Brown's direction, the Company has taken several steps to improve its
operations. The Company has also commenced testing of its "Seafood Grille"
concept, reduced costs by changing to lower cost seafood suppliers, commenced
efforts to renegotiate certain property leases, hired a new Director of
Marketing, retained a new advertising agency, held regional meetings with
franchisees for the first time in several years, attended franchise conventions
to promote the Company and produced new promotional and advertising materials.
On November 27, 1996, the Company purchased all of the issued and outstanding
shares of capital stock of M.I.E. Hospitality, Inc. ("MIE" and the "MIE
Acquisition"). The Company paid $2,250,000 in connection with the MIE
Acquisition, including $250,000 placed into an escrow account towards
post-closing adjustments. As of June 30, 1997, the Sellers had paid or agreed to
pay the Company $234,000 from the escrow account.
MIE, formerly the Company's largest franchisee and now a wholly-owned
subsidiary, had an exclusive territory in New York, Pennsylvania, New Jersey and
Delaware, where it operated 33 stores. The Company anticipates that the MIE
Acquisition will provide opportunities for additional expansion, since the
Company can open additional Company owned stores and sell additional franchises
in states where MIE was the exclusive franchisee. Following the purchase of MIE,
the Company purchased six former franchised restaurants in the Detroit area. The
Company believes the six restaurants in the Detroit area are strategically
located in areas with a concentration of Arthur Treacher's restaurants.
Management believes that such restaurants can be better managed by the Company
than by the former franchisees with no additional administrative overhead being
incurred by the Company.
(B) Franchises
The Company has 117 restaurants in its system, consisting of 64 Company owned
restaurants and 53 independently owned and operated franchised locations. The
Company has two geographical options for franchises: individual stores and area
development. The Company has a franchisee that has agreed to open one franchise
for each of the next three years in northeastern Ohio, although such franchisee
does not have any exclusive territory. The Company also has a franchisee with an
exclusive franchise for the province of Ontario, Canada, where there are eight
restaurants.
Pursuant to its franchise agreement, the Company provides its franchisees with a
method of operation, including trade secrets, technical knowledge, a supply
distribution program and standards for customer service, quality control, decor,
layout, signs and accounting systems. The Company also provides centralized
advertising and cooperative advertising programs and an initial training
program, which is required for franchisees. Each franchisee is currently
required to spend a minimum of three percent of monthly gross sales on
advertising. In addition, each franchisee must purchase certain private label,
proprietary food, paper supplies, equipment and signage from Company approved
3
<PAGE>
suppliers and distributors. The Company does not select restaurant sites for
franchisees, but all sites are subject to the Company's approval. The Company
also requires that its franchisees name the Company as an additional insured
party on their property and casualty insurance policies and that vendors provide
subrogation to the Company with respect to their product liability insurance.
Pursuant to the Company's standard franchise agreement, which is incorporated in
its Uniform Franchise Offering Circular, the initial franchise fee for a one
unit franchise is $19,500. The fee for each additional franchise declines
thereafter. The fee for an area development franchise is $49,500. These
franchise fees do not include the costs associated with the operation of the
restaurant, including food, supplies, labor, equipment, occupancy costs and
taxes.
Each franchisee is subject to a royalty fee of a maximum of six percent of the
franchisee's gross sales, net of sales taxes and certain other adjustments,
based upon sales reports at the end of each calendar month. Most franchisees,
including the Canadian franchisee, pay royalties at a rate substantially lower
than six percent of gross sales, with an average royalty of about three percent.
Reduced royalty fees have been granted by the Company for certain older
franchisees and for franchisees who operate multiple units. As of May 31, 1997,
four franchisees operating four restaurants have either been notified of being
in default for non-payment of royalties or are more than 90 days in default on
royalty payments. One of such franchisees, operating two restaurants, and the
Company have executed an installment payment plan with respect to its delinquent
payments. The inability of the Company's franchisees to make payments on a
timely basis will adversely affect the Company's liquidity and its operations.
(c) Corporate Strategy
The Company seeks to focus on three key areas of development:
o The "Seafood Grille" concept,
o Unit Expansion,
o Marketing, Advertising and Promotion.
1. The "Seafood Grille" Concept
The Company is renovating its existing restaurants to adopt the "Seafood Grille"
concept to focus on grilled foods while enhancing the Company's existing brand
name. The Company has begun to expand its menu to include, in addition to its
current fried fish dinner and fried chicken combinations, a selection of grilled
seafood entrees and grilled chicken entrees, together with an assortment of
vegetables and other side dishes. Several species of fish, including tuna, cod,
mahimahi and salmon, are being developed in order to complement the Company's
existing line of seafood products.
4
<PAGE>
Each fish fillet sold under the "Seafood Grille" concept is deep skinned and
flash-frozen under a strict recipe developed by the Company. At each store
location, the fillet is inserted into a special grilling unit for quick cooking.
Test marketing and implementation of this concept began in July 1996 at a
franchised location that the Company purchased in November 1996. As of July 31,
1997, the Company had implemented the "Seafood Grille" concept in 21
restaurants.
The Company is developing a nationwide implementation plan, which will include
operations, marketing and advertising expenditures. The Company will renovate
its Company owned stores from the proceeds of a private placement in November
1996 (the "November Private Placement") and to the extent funds are available
from operating cash flows. The Company expects to spend approximately $85,000
for each restaurant renovation including equipment, signage and approximately
$10,000 for promotional materials related to the "Seafood Grille" concept. The
Company anticipates that all of the restaurants currently owned by the Company
will offer the "Seafood Grille" concept, although the cost of renovation will
depend on such factors as the size of the restaurant, whether the restaurant is
free standing or in a mall, and the amount of equipment to be installed. Such
renovations will be made on a region by region basis so that all restaurants
within a region can benefit from regional advertising and marketing promotions.
New store formats may be developed to enable consumers to view a wider selection
of the Company's menu selections. New store displays may be exhibited at all
restaurant locations to provide consumers with information such as caloric, fat
and cholesterol content in each of the Company's menu items. The Company cannot
require franchisees to renovate their stores to implement the "Seafood Grille"
concept and has not determined whether to provide incentives for such
renovations. Furthermore, the conversion of any existing restaurants that may be
purchased from franchisees will incur additional costs, a portion of which will
come from operations.
2. Unit Expansion
The Company intends to open more Company owned and operated stores and
franchised stores. The Company's system has 117 restaurants, of which 64 (54%)
are Company owned. The Company expects to achieve a ratio of approximately 40%
of the restaurants as Company owned by the year 2000 due to franchise
development. The Company will continue to build its network of Company owned and
franchised restaurants in the United States with additional locations in order
to increase the Company's penetration into local markets. The Company seeks to
expand both in its principal existing markets of Florida, Ohio, Michigan, Texas,
the New York metropolitan area and Ontario and in markets where the Company
previously had a significant presence, including Virginia, Maryland, Washington
D.C., Illinois and New England. The Company has no current plans to expand
outside of the United States and Canada.
Execution of its growth strategy requires the Company's management to, among
other things: (i) identify acquisition candidates who are willing to be acquired
at prices acceptable to the Company; (ii) consummate identified acquisitions;
and (iii) obtain financing for future acquisitions. The Company believes that
the acquisition of franchise restaurants is preferable to opening new
5
<PAGE>
Company owned restaurants where there is a concentration of other restaurants,
particularly Company owned restaurants. Such concentration of Company owned
restaurants enables the Company to achieve more effective control of marketing,
economies of scale regarding the purchase of supplies, the deployment of field
personnel and advertising and thereby improve the restaurants' operations
without any increase in central administrative overhead. The Company believes
that such economies of scale can be achieved if a minimum of six to ten
restaurants are in an area.
The Company does not anticipate further development of its franchise network
until the fiscal year commencing July 1997. The Company wants to implement the
"Seafood Grille" concept, purchase some restaurants from franchisees and improve
its image before again focusing on the sale of franchises. In order to develop
its franchise system, the Company intends to develop joint programs with new
corporate franchisees for regional expansion opportunities in certain selected
markets. This program will entail a corporate sponsor for a particular region
based upon metropolitan population densities. A region would typically be large
enough to cover an area that could accommodate ten or more store locations. The
Company anticipates that a master franchise agreement would be executed with the
corporate franchisee providing it with rights to a specified region and to
support from the Company in order to develop the area within certain guidelines
established by the Company relating, among other things, to a minimum number of
restaurants to be opened within particular time periods. Current agreements do
not require any minimum number of restaurants to be opened in a region and the
Company currently has only one master franchise agreement for Ontario, Canada.
The Company also intends to grant new franchises to operators of single
restaurants. There can be no assurance, however, that suitable franchisees can
be located or that master franchise agreements will be reached at terms
acceptable to the Company.
The Company estimates the cost of opening a new Company owned restaurant at
between $50,000 and $200,000 per restaurant (assuming the purchase, not lease,
of new equipment), depending upon factors such as the size of the restaurant,
the lease and local construction costs. This cost includes the capability for
the "Seafood Grille" concept. By standardizing the construction and equipment
procurement process of its restaurant network, the Company believes that it
could develop the economies of scale in the design and site selection process. A
supplementary benefit of such an expansion program could include proposals to
arrange for regional or national equipment leasing and financing programs and
the use of national or regional contractors to provide support for franchisees
wishing to expand. There can be no assurance that such programs will be reached
at terms acceptable to the Company.
The Company's proposed expansion and store renovations will be dependent on,
among other things, market acceptance of the Company's "Seafood Grille" concept,
the availability of suitable restaurant sites, negotiation of acceptable lease
terms, timely development of such sites, obtaining landlords' consents to
renovations, constructing or renovating restaurants, hiring of skilled
management and other personnel, the general ability to successfully manage
growth (including monitoring restaurants, controlling costs and maintaining
effective quality controls) and the
6
<PAGE>
availability of adequate financing. In the case of franchised restaurants, the
Company will be substantially dependent on the management skills of its
franchisees.
3. Marketing, Promotion and Advertising
The Company believes that its brand name is still recognized among consumers in
the northeastern, mid-western and southern regions of the United States
primarily because the Company's primary product line had been a popular
restaurant concept during the early 1970's. The Company and its franchisees
typically spend approximately three to four percent of gross sales per year on
advertising. In addition, suppliers provide the Company with rebates to be spent
by the Company on marketing. In the fiscal year ended June 30, 1996, such
marketing rebates were approximately $400,000. The Company has broad discretion
in spending such marketing allowances.
Management is developing a marketing campaign to re-establish the Company's
brand name. Since June 1996, the Company has retained a new advertising agency
and produced new television commercials. System-wide promotion with coordinated
regional advertising represents an area of opportunity for the Company. Local
advertising by the Company and its franchisees has been, and continues to be,
the predominant form of promotion. The Company has hired a Director of Marketing
who has developed to produce advertising and promotion at the local level
consisting of in-store advertising, local circulars, promotions and newspaper
advertising. By utilizing system-wide promotion with regional advertising
campaigns, the Company expects to achieve greater control and market breadth and
to increase consumer awareness of its products and services while maintaining
creative control over the Company's brand image. Such a program would provide
the Company with system-wide coverage using print, network and cable television,
national radio media.
The franchisees will be expected to pay a portion of the three percent currently
required to be spent on advertising by each franchisee to the Company as a fee
for such coordinated advertising. A portion of the approximately three percent
of gross sales currently spent by the Company for advertising Company owned
stores would also be devoted to the coordinated campaign. The amounts collected
would be utilized entirely on marketing and promotional campaigns to benefit the
entire franchise network.
(D) Suppliers and Pricing
The Company's senior management (most of whom joined the Company since June
1996) have experience with the supply and pricing issues associated with the
food industry. Seafood prices, particularly the price of pollack, are subject to
supply problems due to environmental and economic factors. The Company has
developed measures to minimize the effect on the Company.
7
<PAGE>
The Company's principal product, "Fish and Chips," includes pollack. The Company
utilizes one supplier to the Company owned stores for pollack. Franchisees use
two suppliers for pollack. The Company and its franchisees use three suppliers
for shrimp. For the fiscal year ended June 30, 1996, purchases of pollack and
shrimp accounted for approximately 20% and 7% of the Company's operating
expenses, excluding occupancy costs, respectively. The Company has reduced its
costs since June 30, 1996 by utilizing new suppliers of pollack and shrimp. The
Company anticipates offering salmon, grouper, cod, mahi-mahi and tuna. Such
seafoods' supplies and prices are subject to volatility. Seafoods of the quality
sought by the Company tend to trade on a negotiated basis depending upon supply
and demand at the time of purchase. Supply and price can be affected by multiple
factors, such as weather, politics and economics in the producing countries. An
increase in the prices of seafood, particularly pollack, could have an adverse
effect on the Company's profitability.
The Company maintains relationships with certain seafood vendors in an effort to
obtain seafood of the quality and in the quantity demanded by the Company's
customers. These relationships enable the Company to maintain its supply of fish
as well as affording the Company some price stability. The Company has sought to
mitigate the effects of price volatility by entering into agreements with its
principal fish suppliers to provide fixed prices for seafood products during the
six months to one year duration of the contracts. Such fixed price agreements
also help ensure the Company's supply of fish. To date, some of these agreements
have been oral. The Company's principal suppliers of seafood products are
Odyssey Enterprises, Inc. for fish products and Tampa Bay Fisheries for shrimp.
However, the Company believes that alternate suppliers of pollack and other
seafoods are available if the prices of pollack or other seafoods increase
substantially. Management also intends to take advantage of changing
technologies with respect to the "farming" and breeding of selected species of
fish and seafood products, and currently purchases some fish products that are
"farmed."
The Company uses different individual suppliers for many of its significant
non-seafood items. For example, cups, french fries, chicken, shortening and
proprietary fish batter are each purchased from different individual suppliers
under oral and written agreements which set the price for one year. The
principal suppliers for non-seafood products are Coca-Cola (drink syrup),
Griffith laboratories (batter mix), Heinz U.S.A. (sauces), McCain Foods, Inc.
(potatoes), Phoenix Foods (chicken) and Wilsey Foods, Inc. (shortening). All of
the Company's supplies are delivered by such suppliers to one distributor, Fast
Food Merchandisers Inc., who services the Company's restaurants from three
distribution centers. Any disruption in supplies from such suppliers could
temporarily have an adverse effect on the Company's operations, although the
Company believes that the supplier could readily be replaced. Except with
respect to the Company's proprietary batter mix, franchisees can purchase such
products from other suppliers or distributors, subject to the Company's prior
approval. The Company received approximately $160,000 from royalties on its
batter mix sales in the fiscal year ended June 30, 1996.
8
<PAGE>
(E) Competition
The restaurant business is highly competitive with respect to price, service,
location and food quality and is generally considered to be a mature industry.
Competition in the industry can be expected to increase. The industry is
affected by changes in consumer eating habits and preferences, local, regional
and national economic conditions, demographic trends, automobile traffic
patterns, government regulation, employee availability and commodity and
operating cost fluctuations, many of which are beyond the Company's control. Any
unplanned or unanticipated changes in these factors could adversely affect the
Company.
There are numerous well-established competitors in the operating areas of the
Company. Restaurants operated or franchised by the Company compete directly not
only with quick service restaurants ("QSRs"), but also with moderately priced
family and specialty restaurants. Significant competitors include fast food fish
restaurants such as Long John Silver and Captain D's, casual dining restaurants
with a seafood emphasis such as Red Lobster and Landry's, and other chains that
serve grilled seafood or chicken, or both.
The Company's primary competitors in the fast service seafood restaurant
business are Long John Silver and Captain D's. Both competitors have company
owned and franchised restaurant operations in certain regions of the United
States. Long John Silver is the largest competitor with over 1,300 locations
nationwide. Captain D's, a wholly owned subsidiary of Shoney's, Inc. with
approximately 598 units, has a strong regional presence in the southeastern
United States. The amount of competition varies among the Company's principal
regional markets. Both Captain D's and Long John Silvers compete directly with
the Company in Ohio and Pennsylvania, although the level of competition is
highest in several Pennsylvania markets. Long John Silvers competes directly
with the Company in several of its markets in Florida. In Ontario, the Company
has significant direct competition from independent fish and chips restaurants,
but less direct competition from other major fast service seafood chains. Many
of the Company's competitors possess substantially greater financial, marketing,
personnel and other resources than those of the Company. Such competitive
pressures limit the Company's ability to increase food and beverage prices and
thus may limit the extent to which the Company and its franchisees can offset
certain costs of doing business. There can be no assurance that well-established
competitors will not place additional restaurants in close proximity to those of
the Company and its franchisees.
The Company also faces vigorous competition from other QSR chains in attracting
and retaining suitable franchises. Beginning in the fiscal year commencing July
1, 1997, the Company plans to increase its number of franchised restaurants but
there can be no assurance that it will be able to attract and retain suitable
franchisees.
Competition with the Company can take other forms. The Company also competes
with fast food restaurants and "casual dining" restaurants that offer
specialties other than grilled fish and chicken. Consumer preferences tend to
shift and the variety of alternatives may affect consumer selection. A change by
consumers to other types of products such as pork or beef or to restaurants with
9
<PAGE>
ethnic themes such as Mexican, Chinese or Italian can have a material adverse
affect on the Company's sales.
The Company has developed a concentration of restaurant locations in the food
courts of regional shopping malls. The competition in the malls typically
consists of the seven to thirteen different restaurant concepts in each food
court. Each food concept generally serves a distinctive menu item which may
compete, directly or indirectly, with the Company. There can be no assurance
that the Company will continue to be able to compete effectively with such food
concepts.
(F) Seasonality
The Company derives a significant portion of its sales during the November and
December holiday season, which is reflected in the Company's operating results
for the second quarter. This seasonal effect is dependent upon the general
retailing environment and customers' preference to shopping malls. Approximately
70% of the Company's restaurants are in shopping malls. The Company derives
approximately 15% of its total annual revenues from operations of the stores
located in shopping malls during the holiday season.
(G) Employees
At May 31, 1997, the Company had approximately 700 employees. A total of
approximately 575 employees are paid on an hourly basis and 125 employees
receive a salary. Eight of the Company's employees perform executive functions.
Most of the Company's employees are employed at the Company's restaurants. The
Company believes that the number of persons employed is adequate to conduct the
Company's current level of operations. The Company believes that it would need
an additional two to four administrative employees at its headquarters to manage
the anticipated expansion. The addition of new restaurants will also increase
the number of employees at the restaurants.
Since many of the Company's employees are paid hourly rates related to the
federal minimum wage, increases in the minimum wage will increase the Company's
operating expenses. The Federal government has increased the minimum wage from
$4.25 an hour to $4.75 per hour in October 1996 and will increase the minimum
wage to $5.15 in September 1997. As of May 31, 1997, the Company employed 575
hourly workers, approximately 50% of whom are paid below $5.15 per hour. The
Company believes that increases in the minimum wage will cause operating costs
to increase by less than 0.4% and that such increased cost will be offset by the
Company's recent menu price increase of three percent and increased sales and
reduced costs derived from improved purchasing procedures, of which there can be
no assurance.
(H) Government Regulation
The Company's business is subject to extensive federal, state and local
government regulation, including regulations relating to franchising, public
health and safety, zoning and fire codes. The
10
<PAGE>
failure to obtain or retain food or other licenses would adversely affect the
operations of the Company's restaurants.
The Company is subject to federal and state laws, rules and regulations that
govern the offer and sale of franchises. The Company is also subject to a number
of state laws that regulate certain substantive aspects of the
franchisor-franchisee relationship. If the Company is unable to comply with the
franchise laws, rules and regulations of a particular state, relating to offers
and sales of franchises, the Company will be unable to engage in offering or
selling franchises in such state. The Company believes it is in compliance with
such laws, rules and regulations and has not been cited for non-compliance. In
1995, the Federal Trade Commission ("FTC") conducted an investigation related
specifically to the Company following a complaint filed by certain franchisees
but the FTC took no action. The complaint alleged various misrepresentations by
the Company, including misrepresentations to the franchisees regarding (i) the
investment risk, earnings, food costs and construction costs that could be
expected by a franchisee, (ii) the rate of expansion of the number of Arthur
Treacher's restaurants and (iii) the availability of national advertising and
marketing support. The Company is not currently subject to any investigation by
any federal or state regulatory authority.
On a national level, the FTC requires the Company to furnish prospective
franchisees with a disclosure document which complies with the FTC's Trade
Regulation Rule (the "FTC Rule"). The Company's current FTC disclosure document
is effective for use in 37 states, and the District of Columbia, that do not
require registration of disclosure documents. However, in the 13 remaining
states, the Company is required to register a state-specific document and
receive an effective registration notice prior to the commencement of sales of
franchises in such states. The Company is not qualified to sell franchises in
any state that requires a state specific document although the Company believes
that it could register in such states if it chose to offer franchises in such
states. The Company has begun the registration process in Illinois, New York,
Virginia and Maryland.
The Company will be required to update its FTC disclosure document to reflect
the occurrence of material events. The occurrence of any such events may, from
time to time, require the Company to modify its disclosure documents within 90
days or stop offering and selling franchises until the document is so updated.
There can be no assurance that the Company will be able to update its disclosure
document or become registered to offer or sell franchises in certain states
consistent with its expansion plans or that the Company will be able to comply
with existing or future franchise regulations in any particular state, any of
which could have an adverse effect on the Company.
(I) Trade and Service Marks and Trade Secrets
The Company believes that the "Arthur Treacher's" and the "Arthur Treacher's
Fish & Chips" service marks and other service marks may have significant value
and are important to the marketing of its restaurants and products. All are
registered with the United States Patent Office.
11
<PAGE>
The Company has applied to register "Arthur Treacher's Seafood Grille" as a
service mark. The Company's principal "Arthur Treacher's" and "Arthur Treacher's
Fish and Chips" service marks are subject to renewal for 10 year periods upon
application to the United States Patent Office in 2007. The other service marks
are subject to renewal for 10 year periods on various dates between 1999 and
2001. Upon expiration of each period, the marks may be renewed for successive 10
year periods. There can be no assurance, however, that the Company's trade and
service marks do not, or will not, violate the proprietary rights of others,
that the Company's trade and service marks would be upheld if challenged or that
the Company would not be prevented from using its trade or service marks. Any of
the aforementioned instances could have a material adverse effect on the Company
and its franchisees. The Company's trade and service marks have not been and are
not subject to any material challenges and the Company has acted to vigorously
defend the marks in several isolated instances where alleged infringement has
occurred. The Company is aware of two restaurants in the New York metropolitan
area which infringed on the Company's service mark in 1996, each of which ceased
such infringement upon demand by the Company.
The Company utilizes a proprietary batter mix in connection with the preparation
of its seafood products. There can be no assurance that such recipe will not be
copied by a competitor and that the Company's business will not be adversely
affected.
Item 2. Management's Discussion and Analysis or Plan of Operation.
This Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company should be read in conjunction with the Financial
Statements and Notes thereto appearing elsewhere in this Registration Statement.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
Information set forth herein contains "forward-looking statements"
which can be identified by the use of forward-looking terminology such as
"believes," "expects," "may," "should" or "anticipates" or the negative thereof
or other variations thereon or comparable terminology, or by discussions of
strategy. No assurance can be given that the future results covered by the
forward-looking statements will be achieved. The Company cautions readers that
important factors may affect the Company's actual results and could cause such
results to differ materially from forward-looking statements made by or on
behalf of the Company. Such factors include, but are not limited to, changing
market conditions, the impact of competitive products, pricing and acceptance of
the Company's products.
Overview
The Company's principal sources of revenues are from the operations of the
Company owned restaurants and the receipt of royalties from franchisees. The
Company's cost of sales includes food, supplies and occupancy costs (rent and
utilities at Company owned stores). Operating expenses
12
<PAGE>
include labor costs at the Company owned stores and advertising, marketing and
maintenance costs. Franchise services and selling expenses include fees payable
to regional representatives and their expenses and the salary of the Company's
Director of Franchise Services. General and administrative costs include
expenses incurred for corporate support and administration, including the
salaries and related expenses of personnel at the Company's headquarters in
Jacksonville, Florida (except the Director of Franchise Services), the costs of
operating the headquarters offices (rent and utilities) and certain related
costs (travel and entertainment).
Results of Operations
The following discussion includes the following periods: (i) the nine months
ended March 30, 1997, (the "1997 Nine Months") and the nine months ended March
26, 1996 (the "1996 Nine Months"), (ii) the fiscal year ended June 30, 1996
("Fiscal 1996") and the fiscal year ended June 30, 1995 ("Fiscal 1995"). The
financial statements for the 1997 Nine Months and the 1996 Nine Months have not
been audited or reviewed by an independent certified accountant. The discussion
of the 1997 Nine Months and the 1996 Nine Months reflect the operations of the
Company for such periods and the operations of MIE for the period November 27,
1996 (the date of consummation of the MIE Acquisition) and December 29, 1996.
Results for any interim period are not necessarily indicative of the results for
a full year. The financial results of the Company have been audited as of the
full fiscal years ended June 30, 1996 and June 30, 1995, and do not reflect the
operations of MIE.
1997 Nine Months and 1996 Nine Months
The Company's revenues increased 93.9% to $11,533,846 for the 1997 Nine Months
compared to the 1996 Nine Months. This increase was primarily driven by the
Company's acquisition of MIE, an operator of 32 Arthur Treacher's Fish & Chips
restaurants, and the purchase of nine additional franchise restaurants.
Comparable store sales for restaurants operated a minimum of 12 months increased
1.4% in the 1997 Nine Months compared to the 1996 Nine Months. The increase in
revenues was also stimulated by new marketing campaigns and new menu promotion
items such as scallops, oysters and popcorn shrimp.
The Company's total cost and expenses increased 87.1% to $11,947,913 for the
1997 Nine Months compared to the 1996 Nine Months. Approximately $400,000 of the
increase resulted from settlements of litigations and lease obligations and
start-up cost associated with the Seafood Grille concept in the Detroit market.
Also, the addition of 41 Company-owned restaurants, including 32 purchased from
MIE, increased total costs and expenses compared to the 1996 Nine Months,
although total cost as a percentage to sales declined 3.75% from the 1996 Nine
Months.
The most significant increase from revenues came from restaurant sales, which
increased 123.5% to $10,709,831 in the 1997 Nine Months compared to $4,791,844
in the 1996 Nine Months. Franchise and royalty income decreased 2.8% to $766,176
in the 1997 Nine Months primarily because of the acquisition of 41 franchised
restaurants. Revenues from franchise sales increased to $57,839 in the 1997 Nine
Months from $1,050 in the 1996 Nine Months.
13
<PAGE>
Regional representative fees, which are based on the number of representatives
and the amount of royalty income from franchisees in a representative's region,
declined compared to the 1996 Nine Months in conjunction with the purchase of 41
franchise restaurants. Each representative acted as the Company's exclusive
agent in a designated territory to market and supervise individual franchisees
and to sell franchise opportunities. Each representative received 50% of the
royalties received by the Company under each franchise agreement and $9,000 of
the $19,500 initial franchise fee paid by each franchisee in such territory. The
Company has two remaining regional representatives but the development of the
regional representative program has been discontinued by the Company.
Cost of sales from restaurant operations declined by 2.4% in the 1997 Nine
Months compared to the 1996 Nine Months primarily due to an aggressive effort to
increase the Company's purchasing efficiencies by reducing contract prices with
several major suppliers of fish, shrimp, chicken, potatoes and cooking oil.
General and administrative expenses increased to $1,069,878 for the 1997 Nine
Months compared to $568,407 for the 1996 Nine Months as a result of the
settlements of lawsuits and disputes regarding leases and fees related to a
consulting agreement with the former Chief Executive Officer which became
effective on June 1, 1996. These expenses totaled approximately $452,000 in the
1997 Nine Months.
Interest expense for the 1997 Nine Months was $114,934 compared to $84,471 in
the 1996 Nine Months. The increase in interest expense was a function of
indebtedness incurred with respect to recent acquisitions of restaurants.
Depreciation and amortization increased to $416,388 in the 1997 Nine Months from
$219,892 in the 1996 Nine Months. This increase was primarily caused by the
increase in fixed assets from the acquisitions of restaurants.
As a result of the foregoing, particularly the increase in general and
administrative expenses, the Company's net loss was $1,138,883 in the 1997 Nine
Months compared to a loss of $772,165 in the 1996 Nine Months.
On May 23, 1997 the Internal Revenue Service accepted the Company's proposal of
payment of $20,000 and the forfeiture of $1,180,064 of the Company's net
operating loss for the period prior to 1992 and removed all restrictions
relative to the use of the Company's remaining net operating losses for the tax
periods prior to 1992 and all subsequent net operating losses.
Fiscal 1996 and Fiscal 1995
The Company's revenues increased to $7,877,910 in Fiscal 1996 from $7,218,455 in
Fiscal 1995, an increase of 9%. The most significant increase was in sales at
Company owned restaurants, where revenues increased 18% to $6,648,564 in Fiscal
1996. Although the number of Company owned
14
<PAGE>
stores increased from 23 at the ended of Fiscal 1995 to 24 at the end of Fiscal
1996, revenues at Company owned stores increased principally through the
purchase of six restaurants from franchisees which, in the aggregate, had
substantially higher sales than the aggregate sales of the three Company owned
stores that were closed and the one Company owned store that was sold to a
franchisee in Fiscal 1996. Franchise and royalty income declined 20% to
$1,228,296 in Fiscal 1996 primarily because of the reduction in the number of
franchised restaurants from 123 at the end of Fiscal 1995 to 103 at the end of
Fiscal 1996. Revenue from initial franchise fees declined to $1,050 from $63,550
because only one franchise was sold in Fiscal 1996.
The Company's total costs and expenses increased 8% to $8,863,737 in Fiscal
1996. The cost of sales, including occupancy, at Company owned stores increased
16% to $3,856,776 in Fiscal 1996. As a percentage of revenues from Company owned
restaurants, the cost of sales, including occupancy, decreased from 59% in
Fiscal 1995 to 58% in Fiscal 1996. The Company's operating expenses increased
15% to $2,742,907 in Fiscal 1996. As a percentage of revenues, operating
expenses increased from 33% in Fiscal 1995 to 35% in Fiscal 1996. Such increases
were primarily due to increased costs to associated with higher sales volumes.
Franchise service and selling expenses declined 17% to $876,584 in Fiscal 1996,
representing 11% and 15% of total revenue in Fiscal 1996 and Fiscal 1995,
respectively, as a result of lower costs associated with servicing fewer
franchisees. Fees payable to regional representatives declined in conjunction
with the decline in revenues from franchisees. The Company's general and
administrative expenses increased 55.6% to $1,097,350 in Fiscal 1996 compared to
Fiscal 1995. As a percentage of revenues, general and administrative expenses
increased to 14% in Fiscal 1995 from 10% in Fiscal 1996 as a result of
settlements of lawsuits and disputes regarding leases. General and
administrative expenses can be expected to increase in Fiscal 1997 as a result
of the Company's anticipated expansion plans.
Interest expenses for Fiscal 1996 also increased to $168,513 from $101,818 in
Fiscal 1995 as a result of increased payments to Bank One, the restructuring of
lease obligations and interest payable on promissory notes issued in connection
with the purchase of restaurants from franchisees and restructuring of lease
obligations.
Depreciation and amortization increased 69% to $290,120 in Fiscal 1996 as a
result of the acquisition of the five new Company owned stores and costs
associated with the closing of three Company owned stores. The Company also did
not benefit from any net operating loss carry forward in Fiscal 1996 compared to
a benefit of $146,600 in Fiscal 1995.
As a result of the foregoing, the Company's net loss increased to $1,154,340 in
Fiscal 1996 from $389,998 in Fiscal 1995.
Liquidity and Capital Resources
The Company has financed its operations principally from revenues derived from
Company owned stores and royalty income from franchisees, private placements of
equity and a line of credit from a bank. The Company had a working capital
surplus of $286,832 at March 30, 1997 compared with
15
<PAGE>
a working capital deficit of $1,252,796 at June 30, 1996. The Company had cash
and short-term investments of $1,739,272 at March 30, 1997 compared to $985,616
at June 30, 1996. Particularly before the installation of new management and
change in control in June 1996, operating losses caused the Company to suffer
liquidity problems, which included the Company's inability to make certain lease
and note payments when due. The Company became in arrears with respect to
certain leases because of poor performance by stores in those locations. The
Company had also incurred indebtedness in connection with (i) the conversion of
past due amounts under certain leases to indebtedness and (ii) the repurchase of
certain franchises, but several of such restaurants were unable to generate
sufficient revenues to repay the indebtedness.
In order to increase its working capital and alleviate such liquidity problems,
the Company sold 3,042,463 shares of Common Stock in a private placement for
aggregate gross proceeds of $1,919,275 from June through September 1996 (the
"June Private Placement") and sold 3,163,911 shares of Common Stock in a private
placement for aggregate gross proceeds of $5,631,761 in November and December
1996 (the "November Private Placement"). The Company utilized approximately
$400,000 of the proceeds of the June Private Placement to provide collateral to
Bank One as security for the then outstanding indebtedness of $750,000,
approximately $350,000 to satisfy trade payables that were outstanding as of
June 1, 1996, approximately $250,000 to fund losses from operations,
approximately $166,000 for expenses incurred in connection with the offering and
the change of control of the Company through the hiring of Mr. R. Frank Brown,
approximately $125,000 for advertising and public relations and the costs
associated with the hiring of new management personnel, approximately $105,000
for (i) the repayment of notes due former franchisees who had sold restaurants
to the Company and (ii) lease obligations, approximately $142,000 for accounting
and legal expenses incurred in conjunction with and after the private placement
and with respect to the defense of ongoing litigation and approximately $78,000
for placement fees in connection with the private placement. See "Certain
Transactions."
In November and December 1996, the Company received net proceeds of
approximately $5,100,000 from the proceeds of the November Private Placement
after deduction of commissions and selling expenses.
The Company spent $2,250,000 of the proceeds of the November Private Placement
for the purchase of all of the outstanding capital stock of MIE, including a
cash payment of $1,631,563 to the former shareholders of MIE and $618,437 for
the payment of certain indebtedness of MIE owed to Magee Industrial Enterprises,
Inc. The Company believes that the purchase of MIE will provide additional
opportunities for expansion, since the Company may now open additional Company
owned stores and sell additional franchises in New York, New Jersey,
Pennsylvania and Delaware, where MIE was the exclusive franchisee and had
exclusive development rights. In addition, the Company believed that it could
operate the 32 stores owned by MIE with minimal increase in administrative
overhead and that the purchase of the 32 stores would provide the Company with
more flexibility and control over the implementation of the "Seafood Grille"
concept. The Company anticipates that (i) an improvement in the operations of
the stores purchased from MIE, which had revenues of $14,399,959 in the year
ended December 29, 1996, (ii) revenues which may be generated
16
<PAGE>
from Company owned stores which the Company plans to open in MIE's former
territory and (iii) the additional franchise fees and royalty income from
additional franchises to be sold in such states will each have a positive impact
on liquidity.
The Company used $364,000 of the proceeds of the November Private Placement to
satisfy its remaining obligations to Bank One The Company has also utilized the
proceeds of the November Private Placement for restaurant renovations to expand
the Seafood Grille concept, acquisition of restaurants and settlements of past
due amounts to certain landlords and settlement of certain litigation. The
Company is now current regarding lease payments on all of its restaurant leases.
The Company anticipates that it will need additional capital to fund investments
in capital expenditures related to the Seafood Grille concept. The Company
expects to spend approximately $2,000,000 through June 30, 1998 to develop the
Seafood Grille concept in additional markets in the United States. The Company
also expects to spend approximately $1,000,000 in working capital to renovate
its existing Company owned restaurants to selectively introduce the Seafood
Grille concept.
For the 1997 Nine Months, the Company experienced negative cash flow resulting
primarily from start-up expenses related to the introduction of the Seafood
Grille concept into the Detroit marketplace, legal and lease obligation
settlements, integration expenses related to the acquisitions of M.I.E. and
other restaurants. The Company believes the costs incurred in the development of
the Seafood Grille concept will enable the Company to re-position itself in the
marketplace for quick service restaurants, as the Company can emphasize its
broiled food products.
The management of the Company has reduced certain costs since the change of
control in June 1996 and continues to seek opportunities to reduce the Company's
operating costs. Since March 30, 1997, management of the Company has reduced its
administrative staff and has reassigned various middle management positions to
yield a cost savings of approximately $275,000 annually. Since June 30, 1996,
the Company has changed suppliers and distributors to further reduce costs. In
addition to these measures, management has also initiated a menu price increase
of approximately three percent. The increase in prices was the Company's first
in three years.
The Company believes that its current cash resources, cash flow from operations,
cost savings (including equipment leasing opportunities and new supplier
relationships) and the anticipated proceeds from the proposed sale of real
estate at one location will be sufficient to adequately fund its current working
capital needs through the fiscal year commencing July 1, 1997, although
additional financing may be required for all planned capital expenditures. In
the event that the Company needs additional working capital to finance its
operations or capital expenditures, the Company believes it could meet its needs
through either additional borrowings or the sale of additional equity, although
there can be no assurance that the Company would be successful in obtaining any
such financing, or on what terms such transactions could be effected.
17
<PAGE>
Item 3. Description of Property.
The Company's principal executive offices are located at 7400 Baymeadows Way,
Jacksonville, Florida 32256 (904-739-1200). The Company rents its 7,600 square
feet of headquarters space for an annual rent of approximately $134,000 pursuant
to a lease which expires in 2001. The Company believes that its headquarters
space is adequate for its proposed expansion.
The Company's 64 restaurants include 31 restaurants located in premises leased
by the Company, 32 located in premises leased by MIE, a wholly-owned subsidiary
of the Company, and one in a property owned by MIE. In addition, with respect to
five leases, the Company either guarantees the obligations of franchisees or
leases the properties and subleases them to franchisees. The Company's free
standing restaurants are each approximately 2,000 square feet and the Company's
restaurants located in malls are each approximately 400 to 1,100 square feet.
The leases have remaining terms ranging from one to 16 years. Many of the leases
contain renewal options for periods of five to 10 years. The Company is
reviewing whether to continue to operate any marginal restaurants acquired in
the MIE Acquisition and to renegotiate the terms of each restaurant lease upon
the expiration of each lease. The following chart sets forth the expiration
dates of the terms of (i) the leases of Company owned restaurants, and (ii) the
Company's leases which are subleased to franchisees and leases of franchisees
which are guaranteed by the Company.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C><C>
Leases Subject
to Guarantees
Number of Leases or Subleases Expiration Date
6 0 1997
4 1 1998
7 0 1999
3 1 2000
14 0 2001
11 2 2002
13 0 2003
7 1 2004
3 0 After 2004
</TABLE>
Item 4. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth information as of July 15, 1997 with
respect to officers, directors and persons who are known by the Company to be
beneficial owners of more than 5% of the Company's Common Stock. Except as
otherwise indicated, the Company believes that the beneficial owners of the
Common Stock listed below, based on information furnished by such owners, have
sole investment and voting power with respect to such shares, subject to
community property laws where applicable.
18
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Shareholder Shares Percentage
Bruce R. Galloway(1) 1,807,334 12.0
Lifeyrissjodur Austurlands 1,179,875 8.2
NTS Financial Services, Ltd.(2) 1,167,666 8.0
Evan Binn and Ronna Binn(3) 924,592 6.4
Knoll Capital Management, Inc.(4) 833,916 5.8
Liferissjodur Vestmannaeyinga 823,125 5.7
Lifeyrissjodurinn Hlif 821,875 5.7
AFC Enterprises, Inc.(5) 776,666 5.4
Magee Industrial
Enterprises, Inc.(6) 765,625 5.1
R. Frank Brown(7) 190,000 1.3
Heinz Schimmelbusch(8) 66,668 0.5.
William Saculla(9) 15,000 0.1
Officers and Directors as a Group 4,080,564 26.4%
Total Outstanding Shares (10) 14,377,531
</TABLE>
Notes
(1) Mr. Bruce R. Galloway is the Chairman of the Board of the Company.
Includes warrants to purchase 430,000 shares of Common Stock at a purchase price
of $1.51, which warrants are exercisable through May 31, 2001. Includes warrants
to purchase 250,000 shares of Common Stock which are exercisable at an exercise
price of $3.00 per share through December 31, 2001.
(2) Mr. Skuli Thorvaldsson, the Vice Chairman of the Company, is the
President of NTS Financial Services, Ltd. Includes warrants to purchase 250,000
shares of Common Stock at a purchase price of $1.51, which warrants are
exercisable through May 31, 2001. Includes warrants to purchase 50,000 shares of
Common Stock which are exercisable for a term of five years at an exercise price
of $3.00 per share.
(3) Includes warrants to purchase 50,000 shares of Common Stock owned by
Mr. and Mrs. Binn, which warrants are exercisable at a purchase price of $1.51
per share through May 31, 2001.
(4) Mr. Fred Knoll, a Director designee of the Company, is the sole
shareholder of Knoll Capital Management, Inc.
19
<PAGE>
(5) Includes warrants to purchase 100,000 shares of Common Stock owned by
Mr. Andrew Catapano, President of AFC Enterprises. Such warrants are exercisable
at a purchase price of $1.51 per share through May 31, 2001.
(6) Gives effect to the conversion of 490,000 shares of Series B Preferred
Stock into 765,625 shares of Common Stock for no additional consideration.
(7) Mr. R. Frank Brown is the President, Chief Executive Officer, Treasurer
and a Director of the Company. Includes 140,000 options granted which have
vested and 560,000 options granted which have not vested pursuant to Mr. Brown's
employment agreement to purchase an aggregate of 700,000 shares of Common Stock,
with an exercise price of $1.375 per share with respect to 350,000 shares and an
exercise price of $2.125 per share with respect to 350,000 shares. 20% of such
options vest each year for a period of five years commencing June 1, 1997.
(8) Mr. Heinz Schimmelbusch, a Director designee, disclaims beneficial
ownership of 133,334 shares of Common Stock held in trust for his children.
(9) Mr. William Saculla is the Secretary of the Company. Does not include
options which have been granted but have not vested to purchase 15,000 shares of
Common Stock at a price of $2.65 per share. 20% of such options vest for a
period of five years commencing September 1, 1997.
(10) Gives no effect to the issuance of any shares of Common Stock upon the
exercise of any outstanding options or warrants, including: (i) 1,335,000 shares
of Common Stock upon the exercise of currently exercisable warrants with an
exercise price of $1.51 per share, (ii) 400,000 shares of Common Stock upon the
exercise of currently exercisable warrants with an exercise price of $3.00 per
share, (iii) 316,391 shares of Common Stock upon the exercise of currently
exercisable warrants issued to the placement agent of the November Private
Placement, with an exercise price of $3.30 per share, (iv) 167,500 shares of
Common Stock issuable to employees of the Company other than Mr. Brown for an
exercise price of $2.65, which vest over a period of five years commencing
September 1, 1997, (v) 5,000 other warrants with an exercise price of $3.00 per
share exercisable through January 31, 2002, and (vi) 700,000 shares of Common
Stock issuable upon the exercise of options which vest over a period of five
years issued to Mr. Brown, and the issuance of 862,514 shares of Common Stock
upon conversion of all of the outstanding shares of Series A and Series B
Preferred Stock.
Magee Industrial Enterprises is the sole owner of the 490,000 shares of
Series B Preferred Stock which is convertible into 765,625 shares of
Common Stock. Twenty shareholders, none of whom are affiliated with the
Company, own all of the 89,200 outstanding shares of Series A Preferred
Stock, which are convertible into any aggregate of 133,800 shares of
20
<PAGE>
Common Stock pursuant to the terms of an agreement in principle between the
Company and the holders of the Series A Preferred Stock. See "Description of
Securities."
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Item 5. Directors, Executive Officers, Promoters and Control Persons.
Name Age Position
Bruce R. Galloway 39 Chairman of the Board
R. Frank Brown 48 President, Chief Executive Officer,
Treasurer and Director
Skuli Thorvaldsson 55 Vice Chairman of the Board
Fred Knoll 41 Director (Designee)
Heinz Schimmelbusch 53 Director (Designee)
Dennis S. Bookshester 58 Director (Designee)
William F. Saculla 45 Secretary
</TABLE>
21
<PAGE>
Directors
Bruce R. Galloway. Mr. Galloway has been Chairman of the Board of Directors
since May 1996. Mr. Galloway is currently a managing director of Burnham, the
placement agent in the November Private Placement, an NASD Broker/Dealer and
investment bank based in New York. Prior to joining Burnham in 1993, Mr.
Galloway was a senior vice president at Oppenheimer & Company, an investment
bank and NASD Broker/Dealer based in New York, from 1991 through 1993. Mr.
Galloway holds a B.A. degree in Economics from Hobart College and an M.B.A. in
Finance from New York University's Stern Graduate School of Business.
R. Frank Brown. Mr. Brown has served as President, Chief Executive Officer,
Treasurer and Director since May 1996. From May 1995 to May 1996, Mr. Brown
worked as a consultant to an investment group associated with the Company. Prior
to working for the Company, Mr. Brown was associated with Shoney's and Captain
D's. From August 1992 to May 1995, he operated, as a franchisee, two Shoney's
restaurants in northern Utah. From November 1984 to August 1992, Mr. Brown was
President of Captain D's. From August 1978 through November 1984, Mr. Brown held
numerous positions within the Captain D's organization, including Group Vice
President, Vice President of Franchise Operations, Director of Franchise
Operations, Director of Personal and Training, Personal Recruiter and Unit
Manager. Mr. Brown is a 1972 Graduate of Purdue University, where he received a
B.A. degree in Psychology.
Skuli Thorvaldsson. Mr. Thorvaldsson has been Vice Chairman of the Board of
Directors since May 1996. Mr. Thorvaldsson has been the Chief Executive Officer
of the Hotel Holt in Iceland since 1980. Since 1992, Mr. Thorvaldsson has been
the President of NTS Financial Services, Ltd. Mr. Thorvaldsson has various
diversified interests in food court services, travel agency and pork processing.
He is also a master franchisee of Domino's Pizza in Scandinavia. Mr.
Thorvaldsson is a director of Allied Resources Corp. Mr. Thorvaldsson graduated
from the Commercial College of Iceland and the University of Barcelona. Mr.
Thorvaldsson received his Degree in Law from the University of Iceland.
Fred Knoll. Mr. Knoll is a Director designee of the Company. Since 1987, he
has been the principal of Knoll Capital Management, L.P., a venture capital firm
specializing in the information technology industry. From 1989 until 1993, Mr.
Knoll was Chairman of the Board of Directors of Telos Corporation (formerly C3
Inc.), a computer systems integration company with approximately $200 million in
annual sales. From 1985 to 1987, Mr. Knoll was an investment manager for General
American Investors, responsible for the technology portfolio, and served as the
United States representative on investments in leveraged buyouts and venture
capital for Murray Johnstone, Ltd. of Glasgow, Scotland. Mr. Knoll is the
Chairman of the Board of Thinkings Tools Inc. and of Lamar Signal Processing
Ltd., and he is a director of numerous companies including Spradling Holdings
Ltd. and U.S. Energy Systems Inc. Mr. Knoll is on the Board of Advisors of SRI
International (the European division of Stanford Research Institute) and is a
co-manager of the Valor Capital Management and Valor International public stock
funds. Mr. Knoll holds a B.S. in Electrical
22
<PAGE>
Engineering and Computer Science and a B.S. in Management from
Massachusetts Institute of Technology and an M.B.A. from Columbia University in
Finance and International Business.
Heinz C. Schimmelbusch. Mr. Schimmelbusch is a Director designee of the Company.
He is Chairman, President and Chief Executive Officer of Allied Resource
Corporation ("Allied"), a company founded by Mr. Schimmelbusch in 1994 to
develop companies active in mining, advanced materials and recycling. Mr.
Schimmelbusch is also Chairman of Alanx Corporation, a producer of composite
ceramics for wear solutions; Chairman and Chief Executive Officer of Puralube,
Inc., which is commercializing an advanced process for re-refining used oil; and
a Director of Northfield Minerals Inc., a gold mining and exploration company
listed on the Toronto Stock Exchange. Mr. Schimmelbusch has been a Director of
Safeguard Scientific Corporation, a company whose shares are listed on the New
York Stock Exchange, since 1989. Prior to 1994, Mr. Schimmelbusch was Chairman
of the Management Board of Metallgesellschaft AG, Germany, a multinational
company in the process industries, and Chairman of the Supervisory Board of
LURGI AG, Germany's leading process engineering firm; of Buderus AG, a leading
manufacturer of commercial and residential health equipment; of Dynamit Nobel
AG, a leading manufacturer of explosives; and Norddeutsche Affinerie AG,
Europe's largest copper producer. Mr. Schimmelbusch also served on the Boards of
several leading German Corporations and institutions, including Allianz
Versicherungs AG, Munich; Philipp Holzmann AG, Frankfurt; Mobil Oil AG, Hamburg;
Teck Corporation, Vancouver; and others. Mr. Schimmelbusch has been the founder
and Chief Executive Officer of a number of public companies in process
industries, including: Inmet Corporation, Toronto, Canada (formerly Metall
Mining Corporation); Methanex Corporation, Vancouver, Canada; and B.U.S.
Umweltservice AG, Frankfurt, Germany. Mr. Schimmelbusch served as a Member of
the Presidency and Chairman of the Environmental Division of the German
Industrial Association (BDI) and represented Germany on the Executive Board of
the International Chamber of Commerce, Paris, where he held the office of Vice
President. Mr. Schimmelbusch received his graduate degree (with distinction) and
his doctorate (magna cum laude) in Economics from the University of Tubigen,
Germany.
Dennis S. Bookshester Mr. Bookshester is a Director designee of the Company.
Since 1991, he has been a business consultant. In January 1997, he became
President and Chief Executive Officer of H20 Plus, LLP. From 1990 through 1991,
he served as President and Chief Executive Officer of Zale Corporation. From
1984 through 1989, he served as Vice Chairman of Carson Pirie Scott & Company
and as Chairman and Chief Executive Officer of its retail division. From 1983
through 1984, he served as the President and Chief Executive Officer of the
Department Stores Division of Carson Pirie Scott & Company. From 1977 through
1983, he held various executive positions with Associated Dry Goods Corporation,
where he served as President of its Caldor, Inc. subsidiary from 1982 through
1983, as Chairman and Chief Executive Officer of Sibley, Lindsay and Curr
Division from 1978 through 1982 and as President of such division from 1977
through 1978. From 1961 through 1977 he was with Federated Department Stores,
Inc. where he became Senior Vice President of Merchandising. Mr. Bookshester is
a Director of Evans, Playboy Enterprises Inc., AMRE, Fruit of the Loom, Sundance
Homes, American Gem Corporation and the University of Chicago Council for the
Graduate School of Business. Mr. Bookshester received his B.S. degree from the
University of Alabama in 1960.
23
<PAGE>
William F. Saculla. Mr. Saculla has served as Secretary of the Company
since 1984. Mr. Saculla is responsible for the Company's financial reporting
activities and internal controls. Mr. Saculla earned a B.S. degree in Accounting
from Youngstown State University in 1978.
Each Director is elected to serve until the Company's next annual meeting of
Shareholders and until his successor is duly elected and qualified. There are no
agreements with respect to the election of directors. Executive officers are
appointed annually by the Board of Directors and each executive officer serves
at the discretion of the Board of Directors. The Director designees have agreed
to become members of the Board of Directors upon the Company obtaining Director
and Officer liability insurance. The Company has requested bids for such
insurance to several insurance companies and will obtain such insurance upon
acceptance of a bid.
Other Key Employees
Michael D. Proulx, Director of Franchise Services. Mr. Proulx has served as
Director of Franchise Development since January 1994. He was the owner of a
Company franchise from December 1992 through August 1996, when it was purchased
by the Company. Prior to October 1992, Mr. Proulx was a Commissioned Officer
serving as a Pilot and Intelligence Officer in the United States Army with
assignments that included that of Company Commander, Airfield Commander and
Brigade Operations Officer. Mr. Proulx is a 1973 graduate of Cornell University
where he received a B.S. degree in Economics. Mr. Proulx also received an M.S.
degree in International Relations from Troy State University in 1988.
Jana Williams, Director of Marketing. Ms. Williams rejoined the Company as
the Director of Marketing in June 1996. Prior to this, Ms. Williams was the
Marketing and Media Coordinator for the Company from December 1993 to January
1996. From January 1996 to June 1996, she was an Account Coordinator at Harte
Hanks Direct Marketing. From January 1992 to June 1993, Ms. Williams served as a
Convention Coordinator for Technol Medical Products, Inc., in Fort Worth, Texas.
From May 1986 through January 1992, she served as Women's Services Specialist
for the Team Bank in Dallas, Texas. Ms. Williams is a 1990 graduate of the
University of Texas, Arlington where she earned a B.A. in Marketing.
Committees
In December 1996, the Board of Directors formed the following committees:
Executive, Compensation and Audit. The Board of Directors elected Frank Brown,
Bruce Galloway and Skuli Thorvaldsson to the Executive Committee. The
Compensation Committee of the Board of Directors was formed to review the
Company's executive compensation proposals, subject to the approval of the Board
of Directors. The Compensation Committee is composed of Dennis Bookshester,
Skuli Thorvaldsson and Bruce Galloway. The Audit Committee was formed to advise
the Board in matters relating to the audit of the Company's financial statements
and the Company's financial reporting systems. The Board elected Messrs. Bruce
Galloway, R. Frank Brown, William Saculla, the
24
<PAGE>
Company's Secretary, and George Koo, an independent advisor to the Company, as
members of the Audit Committee.
In addition, the International Advisory Committee was formed to advise the Board
of Directors regarding international operations and expansion opportunities,
although without the power to obligate the Company. The Board selected Gudmundur
Jonsson, David Baron, Valdimar Thomasson, Evan Binn, Gisly Martinsson, Lorie
Karnath and Hans Rutkowski to the International Advisory Committee.
25
<PAGE>
Item 6. Executive Compensation.
The following table provides certain summary information concerning the
compensation paid or accrued by the Company to or on behalf of its Chief
Executive Officer and the other named executive officers of the Company for
services rendered in all capacities to the Company and its subsidiaries for the
fiscal years ended June 30, 1996, 1995 and 1994.
(a) Summary Compensation Table
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Long-Term Compensation
Annual Compensation Awards Payouts Payouts
Name and Other Annual Restricted Securities LTIP All Other
Principal Position Year Salary Bonus Compensation Stock Underlying Payouts Compensation
Award(s) Options/SARs
R. Frank Brown 1996 $10,025.00 0.00 $0.00 0.00 700,000 $0.00 0
President, CEO, shares of
Treasurer Common Stock
1995 $0.00 0.00 $0.00 0.00 0 $0.00
1994 $0.00 0.00 $0.00 0.00 0 $0.00 0
William Saculla 1996 $75,000.00 $1,000 $0.00 0.00 0 $0.00 0
Secretary
1995 $70,000.00 0.00 $0.00 0.00 0 $0.00
1994 $65,000.00 0.00 $0.00 0.00 0 $0.00 0
26
<PAGE>
(b) Option/SAR Grants in Last Fiscal Year
Number of Securities Percent of total
Underlying Options/SARs options/SARs granted to
Name granted employees in fiscal year Exercise or base price Expiration Date
R. Frank Brown (1) 700,000 shares of 100% $1.375 for 350,000 Shares 2002-2006
Common Stock $2.125 for 350,000 Shares
- ----------------------
(1) 20% of these options vest each year over a period of five years commencing
June 1, 1997 and are exercisable for five years after vesting.
(c) Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
Shares acquired on Number of Unexercised Value of unexercised in-the-money
Name exercise Value Realized options/SARs at June 30, 1996 options/SARs at June 30, 1996
R. Frank Brown(1) 0 0 700,000 options $0 Exercisable,
$262,500 Unexercisable
- ----------------------
(1) 20% of these options vest each year over a period of five years commencing
June 1, 1997 and are exercisable for five years after vesting.
(d) Long-Term Incentive Plans - Awards in Last Fiscal Year
Estimated future payouts under non-stock price based plans
Number of shares, Performance or other period
Name units or other rights until maturation or payout Threshold Target Maximum
R. Frank Brown(1) 700,000 June 1997-June 2001 N/A N/A N/A
</TABLE>
- ----------------------
(1) 20% of these options vest each year over a period of five years commencing
June 1, 1997 and are exercisable for five years after vesting.
Mr. R. Frank Brown has executed an employment agreement with the Company which
provides for a salary of $125,000 per year for a term of two years commencing
June 1, 1996. The agreement is renewable annually for additional one year terms.
Pursuant to the employment agreement, the Company granted Mr. Brown options to
purchase an aggregate of 700,000 shares of Common Stock, with an exercise price
of $1.375 per share with respect to 350,000 shares and an exercise price of
$2.125 per share with respect to 350,000 shares. 20% of these options vest each
year over a period of five years commencing June 1, 1997 and are exercisable for
five years after vesting. In the event that Mr. Brown's employment contract is
not renewed, he will only be entitled to exercise those
27
<PAGE>
options which have vested as of the date of termination. The Company has
also purchased $1,000,000 of key man life insurance on Mr. Brown, of which the
Company is the beneficiary. Ownership of the policy will be assigned to Mr.
Brown upon termination of Mr. Brown's employment. Mr. Brown also receives a car
allowance of $600 per month.
Item 7. Certain Relationships and Related Transactions.
On May 31, 1996, Mr. James R. Cataland sold 2,000,000 shares of Common Stock to
an investor group led by Mr. Bruce Galloway, the Company's Chairman of the
Board, for an aggregate sale price of $1,200,000. With respect to such 2,000,000
shares, Mr. Galloway purchased 416,667 shares, NTS Financial Services, LTD. (an
affiliate of Mr. Thorvaldsson, the Company's Vice Chairman of the Board)
purchased 416,666 shares, Lifeyrissjodurinnn Hilf (an Icelandic pension fund)
purchased 546,875 shares, Heinz Schimmelbusch and members of his family
purchased 200,000 shares and certain non-affiliates of the Company purchased the
remaining 419,792 shares. Contemporaneously with such sale, James A. Cataland
and William Saculla resigned from the Board of Directors of the Company, Mr.
Cataland resigned as President of the Company and Messrs. Galloway, Brown and
Thorvaldsson were elected to the Board of Directors. Mr. Galloway paid $0.60 per
share purchased from Mr. Cataland, but received no placement fee in connection
therewith. Certain other purchasers of the balance of 2,000,000 shares of Common
Stock from Mr. Cataland and 3,042,463 shares of Common Stock from the Company
paid $0.64 per share. Of the $0.64 purchase price per share, $0.04 per share was
paid as a placement fee to Mr. Galloway, and other broker/dealers, and Mr.
Cataland and the Company received $0.60 per share from such investors. With
respect to such private placement, approximately $40,000 in placement fees were
paid to Mr. Bruce Galloway in his capacity as a placement agent. Upon the sale
of his shares of Common Stock, Mr. Cataland was retained by the Company as a
consultant under a consulting agreement. Under this agreement, Mr. Cataland
receives a consulting fee of $100,000 per year, payable in bi-weekly
installments for two years which commenced June 1, 1996.
On May 31, 1996, Messrs. Bruce Galloway, Skuli Thorvaldsson and Gudmundur
Jonsson agreed to be jointly and severally liable for the Company's obligations
to Bank One under a term loan in the original principal amount of $750,000 and
Mr. Andrew Catapano, the President of AFC Enterprises (a principal shareholder
of the Company) agreed to guarantee $187,500 of the Company's obligations. Upon
repayment of the loan on December 2, 1996, the guarantees were terminated. In
consideration for such guarantors providing the guarantees and providing
approximately $170,000 to fund certain expenses in connection with the
acquisition of Mr. Cataland's shares and the placement of the Company's Common
Stock in May 1996, the Company issued 555,000 warrants to Mr. Galloway, 250,000
warrants to Mr. Thorvaldsson, 250,000 warrants to Mr. Jonsson and 100,000
warrants to Mr. Catapano. Such warrants are exercisable at a price of $1.51 for
a period of five years through May 31, 2001.
On August 26, 1996, the Company purchased substantially all of the assets and
selected liabilities of Proulx Properties, Inc., a corporation owned by Michael
Proulx, the Company's Director of Franchise
28
<PAGE>
Services. The assets of the corporation consisted of a franchised restaurant
located in Port Charlotte, Florida. The purchase price was 22,000 shares of
Common Stock of the Company valued at $68,750. On the date of the transaction,
the average of the Company's closing bid and asked prices was $3.125 per share.
On November 27, 1996, the Company purchased all of the issued and outstanding
stock of MIE for $1,506,563. The Company also invested $743,437 into MIE, which
amount was immediately paid to Magee Industrial Enterprises ("Magee"), an
affiliate of MIE, to reduce the outstanding indebtedness owed by MIE to Magee to
$1,091,563. The $2,250,000 paid in connection with the MIE Acquisition was paid
from the proceeds of the November Private Placement. As of the date of the
acquisition, Magee was owned by 11 individuals and 10 trusts, all of whom are
relatives or trusts for the benefit of relatives. None of such shareholders own
more than 10% of the issued and outstanding stock of Magee. Harry M. Katerman,
the owner of 8.8% of the stock of Magee is the President of Magee.
The $1,139,563 principal amount of remaining debt owed by MIE to Magee is
evidenced by a promissory note (the "Magee Note") payable in 10 equal semiannual
installments, with the first payment being due on June 1, 1998 and the final
payment being due on December 1, 2002. The principal amount of the Magee Note
bears interest at the rate of eight percent (8%) per annum, and interest is
payable every six months commencing June 1, 1997. In the event of a closing of
any financing by the Company in excess of $10,000,000, provided that the debt or
equity financing which results in equaling or exceeding the aggregate gross
proceeds of $10,000,000 is a debt or equity financing for gross proceeds of a
minimum of $5,000,000 (other than any purchase money financing in connection
with the acquisition of any assets) or the sale of all or substantially all of
the capital stock of the Company or MIE, the balance of all outstanding
principal and interest under the Magee Note shall be immediately due and
payable.
The 490,000 shares of Series B Preferred Stock of the Company owned by MIE were
transferred to Magee in connection with the Company's acquisition of MIE. The
Series B Preferred Stock is convertible into 765,625 shares of Common Stock of
the Company at the option of the Company commencing April 27, 1997. The Company
agreed to pay Magee an amount equal to the accrued dividend on the Series B
Preferred Stock of $390,417 through November 30, 1996 in full on September 1,
1998. Such obligation shall not bear interest and no dividends have accumulated
on such Preferred Stock since November 30, 1996.
In connection with the November Private Placement, Bruce Galloway received
$71,000 as selling commissions. Burnham, the placement agent of the November
Private Placement, had agreed to pay Mr. Galloway, the Chairman of the Board of
the Company and a Managing Director of Burnham, 20% of the cash compensation
payable to Burnham in consideration for his services rendered in connection with
the November Private Placement.
Effective January 10, 1997, the Company issued 250,000 warrants to Mr.
Bruce Galloway, 100,000 warrants to Mr. George Koo (an advisor to the Board) and
50,000 warrants to Mr. Skuli
29
<PAGE>
Thorvaldsson. The warrants are exercisable for a term of five years at an
exercise price of $3.00 per share. The warrants were issued for services
rendered in connection with the acquisition of MIE and represented the
reinstatement of 400,000 warrants previously issued to Mr. Galloway (with an
exercise price of $0.60 per share) which had expired in August 1995.
Item 8. Description of Securities.
The Company's certificate of incorporation provides for an authorized capital
stock of 25,000,000 shares of Common Stock and 2,000,000 shares of Preferred
Stock. 14,377,531 shares of Common Stock, 87,200 shares of Series A Preferred
Stock and 490,000 shares of Series B Preferred Stock are issued and outstanding.
Common Stock
The holders of Common Stock are entitled to one vote per share held of record on
all matters to be voted on by shareholders. There is no cumulative voting with
respect to the election of Directors, with the result that holders of more than
50% of the shares voting for the election of directors can elect all of the
directors. The holders of Common Stock are entitled to receive dividends when,
as and if declared by the Board of Directors from sources available therefor. In
the event of liquidation, dissolution or winding up of the Company, whether
voluntary or involuntary, the holders of Common Stock are entitled to share
ratably in the assets of the Company available for distribution to stockholders
after payment of liabilities and after provisions for each class of stock, if
any, having preference over the Common Stock. All outstanding shares are fully
paid and non-assessable and legally issued. Shareholders do not have any
preemptive rights to subscribe for or purchase any stock, warrants or other
securities of the Company. The Common Stock is not convertible or redeemable.
Preferred Stock
The Series A Preferred Stock is entitled to a cumulative dividend of $0.10 per
share per annum. Such dividends accrue annually but are payable if and when the
Board declares a dividend. The Company has not paid any dividends with respect
to the Series A Preferred Stock. Accordingly, no dividends may be distributed
with respect to the Common Stock so long as there are accrued and unpaid
dividends on the Series A Preferred Stock. The holders of the Series A Preferred
Stock are not entitled to vote, except as required by law. The 87,200
outstanding shares of Series A Preferred Stock are convertible into 96,889
shares of Common Stock for no additional consideration at the option of the
holder of the stock. The Series A Preferred Stock is entitled to a liquidation
preference of $1.00 per share, plus any accrued and unpaid dividends. The Series
A Preferred Stock may be redeemed by the Company at a redemption price of $1.00
per share plus all accrued and unpaid dividends. The amount of accumulated and
unpaid dividends was approximately $96,000 as of December 31, 1996. The Company
has an agreement in principle with the holders of the Series A Preferred Stock
to issue such holders 133,800 shares of Common Stock in consideration for the
87,200 shares of Series A Preferred Stock and all accumulated and unpaid
dividends on the Series
30
<PAGE>
A Preferred Stock. The Common Stock will be issued upon receipt by the Company
of executed agreements which have been sent to the holders of the Series A
Preferred Stock.
The Series B Preferred Stock is entitled to a cumulative dividend of $0.10 per
share per annum. Such dividends accrue annually but are payable if and when the
Board declares a dividend. The holders of the Series B Preferred Stock are not
entitled to vote, except as required by law. The Series B Preferred Stock is
entitled to a liquidation preference of $1.00 per share. The Company has not
paid any dividends with respect to the Series B Preferred Stock. In conjunction
with the acquisition of all of the issued and outstanding shares of capital
stock of MIE from affiliates of Magee on November 27, 1996, Magee (the holder of
all of the issued and outstanding shares of Series B Preferred Stock), and the
Company agreed that no dividends would accumulate on such Preferred Stock after
November 30, 1996. The Company agreed to pay Magee an amount equal to the
accrued dividend on the Series B Preferred Stock of $390,417 through November
30, 1996 in full on September 1, 1998. Such obligation shall not bear interest.
The 490,000 outstanding shares of Series B Preferred Stock are convertible at
the option of the holder or the Company at any time into 765,625 shares of
Common Stock for no additional consideration. The Company has not determined
when it will require conversion of the Series B Preferred Stock into Common
Stock.
Warrants and Options
The Company has issued 1,335,000 warrants to purchase shares of Common Stock at
an exercise price of $1.51 per share. The warrants are exercisable for a period
of five years through May 31, 2001. Some of such warrants were issued to
principals of the Company, including 555,000 warrants to Bruce Galloway, 250,000
warrants to Skuli Thorvaldsson, 250,000 warrants to Gudmundur Jonsson, 100,000
warrants to Andrew Catapano (the owner of AFC Enterprises, Inc., a principal
shareholder of the Company), and 50,000 to Evan Binn (a principal shareholder of
the Company). The remaining 255,000 warrants are held by six people, none of
whom owns more than 65,000 warrants. Mr. Galloway subsequently transferred
125,000 of such warrants. The warrants provide that the Company will, at the
Company's expense and upon the request of the holder of the warrants, include
the shares of common stock underlying the warrants held by such holder in any
registration statement filed by the Company with the Securities and Exchange
Commission (the "Commission"), subject to certain conditions
Pursuant to his employment agreement, the Company granted Mr. Frank Brown
options to purchase an aggregate of 700,000 shares of Common Stock, with an
exercise price of $1.375 per share with respect to 350,000 shares and an
exercise price of $2.125 per share with respect to 350,000 shares. 20% of these
options vest each year over a period of five years commencing June 1, 1997 and
are exercisable for five years after vesting. In the event that Mr. Brown's
employment contract is not renewed, he will only be entitled to exercise those
options which have vested as of the date of termination.
The Company has issued options to employees other than Mr. Brown to purchase an
aggregate of 212,500 shares of Common Stock, 167,500 at an exercise price of
$2.65 per share and 45,000 at an
31
<PAGE>
exercise price of $3.37 per share. 20% of the options with an exercise price of
$2.65 per share vest each year over a period of five years commencing on
September 1, 1996 and are exercisable for five years after vesting. 20% of the
options with an exercise price of $3.37 per share vest each year over a period
of five years commencing on March 27, 1998 and are exercisable for five years
after vesting.
The Company has issued to Burnham warrants to purchase 316,391 shares of Common
Stock in consideration for services rendered as placement agent in the November
Private Placement. The warrants are exercisable for a period of five years from
the date of issue at a price per share equal to$3.30, a price equal to 110% of
the closing bid price of the Company's shares as recorded on the NASD Bulletin
Board on the date of each closing under the November Private Placement. The
warrants provide that the Company will, at the Company's expense and upon the
request of the holders of more than 30% of the warrants and shares of common
stock issuable upon exercise of the warrants, include the shares of common stock
underlying the warrants in any registration statement filed by the Company with
the Commission, subject to certain conditions . The warrants also provide that
the Company is required, at its expense, to file a registration statement with
the Commission to register the shares of common stock issuable upon exercise of
the warrants upon the demand after December 23, 1999, of the holders of a
minimum of 30% of any of such shares of common stock that have not been
previously registered by the Company.
Effective January 10, 1997, the Company issued 250,000 warrants to Mr. Bruce
Galloway, 100,000 warrants to Mr. George Koo and 50,000 warrants to Mr. Skuli
Thorvaldsson. The warrants are exercisable for a term of five years at an
exercise price of $3.00 per share. The warrants were issued for services
rendered in connection with the acquisition of MIE and represented the
reinstatement of 400,000 warrants previously issued to Mr. Galloway (with an
exercise price of $0.60 per share) for services rendered in connection with a
private placement in August 1993 but which had expired in August 1995. The
warrants provide that the Company will, at the Company's expense and upon the
request of the holder of the warrants, include the shares of common stock
underlying the warrants held by such holder in any registration statement filed
by the Company with the Commission, subject to certain conditions .
32
<PAGE>
PART II
Item 1. Market Price of and Dividends on the Registrant's Common Equity and
Other Shareholder Matters.
(a) Market Information
The following table sets forth the high and low prices for the periods
indicated as reported by the National Daily Quotation Service, Inc. between
dealers and do not include retail mark-ups, mark-downs, or commissions and do
not necessarily represent actual transactions, as reported by the National
Association of Securities Dealers Composite Feed or other qualified inter-dealer
quotation medium. As of July 25, 1997, the closing bid price was $3.125 per
share.
Low High
1995 Fiscal Year:
First Quarter 0.560 1.310
Second Quarter 0.680 1.870
Third Quarter 0.680 1.680
Fourth Quarter 0.680 1.180
1996 Fiscal Year:
First Quarter 0.500 1.063
Second Quarter 0.375 0.906
Third Quarter 0.250 0.875
Fourth Quarter 0.500 3.125
1997 Fiscal Year:
First Quarter 2.000 3.375
Second Quarter 3.000 3.375
Third Quarter 3.000 3.875
The Common Stock is recorded on the NASD Bulletin Board with the symbol
ATCH. As of June 30, 1997, the number of record holders of the Company's Common
Stock was 583.
33
<PAGE>
(b) Dividends
To date, the Company has not paid any dividends on its Common Stock.
The payment of dividends, if any, in the future is within the discretion of the
Board of Directors and will depend upon the Company's earnings, its capital
requirements and financial condition, and other relevant factors. The Company
does not intend to declare any dividends in the foreseeable future, but instead
intends to retain all earnings, if any, for use in the Company's business
operations. No dividends may be distributed with respect to the Common Stock so
long as there are accrued and unpaid dividends on the Series A Preferred Stock.
The amount of accumulated and unpaid dividends on the Series A Preferred Stock
was approximately $96,000 as of December 31, 1996. The Company has an agreement
in principle with the holders of the Series A Preferred Stock to issue such
holders 130,800 shares of Common Stock in consideration for the 87,200 shares of
Series A Preferred Stock and all accumulated and unpaid dividends on the Series
A Preferred Stock.
Item 2. Legal Proceedings
In the normal course of the Company's business, certain actions may be filed
against the Company for which the Company and its legal counsel, do not believe
would warrant any merit. Such actions may prove to be meritorious and could
result in settlements which could materially and severely affect the financial
condition of the Company. Except for the following action, no such action is
pending. As of March 31, 1997, the Company has not made any provisions for any
actions, including the action discussed below. There can be no assurance that
any actions against the Company would be resolved in favor of the Company nor
that such actions would be dismissed.
ATAC Corporation and Patrick Cullen v. Arthur Treacher's, Inc. and James
Cataland, Case No. 1:95CV 1032, in the U.S. District Court, Northern District,
Ohio Eastern Division
On November 16, 1994, the Company terminated the agency agreement of a Regional
Development Representative, ATAC Corporation, on the grounds that the agent
breached the agreement by assigning the agency agreement to a third party
without the consent of the Company. On May 9, 1995, ATAC filed the above
lawsuit; however, ATAC did not inform the Company of the lawsuit (via service of
process as prescribed by the Ohio Rules of Civil Procedure). ATAC seeks a
minimum of $2,750,000 in compensatory damages and $6,000,000 in punitive
damages.
On August 31, 1995, ATAC's counsel informed the Company that a lawsuit has been
filed. ATAC alleges that the Company terminated the contract without cause,
tortiously interfered with other business relationships, wrongful conversion of
the territory, restraint of trade and price-fixing, breach of contract, fraud,
RICO and conversion. The Company has filed a partial motion on the pleadings to
dismiss James Cataland, Sr. and William Saculla from the lawsuit. The Company
has also filed a Motion for Judgment on the Pleading which requests the court to
dismiss all claims. If successful, ATAC will only be allowed to proceed under a
breach of contract theory.
34
<PAGE>
The Company believes that the lawsuit is an attempt by plaintiffs to regain the
territory by forcing the Company to defend expensive litigation at significant
expense and that the plaintiffs' claims are without merit. The Company has filed
a counterclaim against ATAC seeking a Declaratory Judgment that ATAC does not
have a service contract with the Company in certain areas which the Company does
business, that ATAC has committed breach of contract and that the Company is
entitled to indemnification for previous lawsuits which have occurred because of
the actions of ATAC on behalf of the Company.
Item 3. Changes in and Disagreements with Accountants.
None
Item 4. Recent Sales of Unregistered Securities.
From May through August, 1996, the Company concluded a private placement of
3,042,463 shares of its Common Stock at $.64 per share (for gross proceeds of
$1,947,176) to 22 accredited investors.
In August 1996 and December 1996, the Company issued an aggregate of 37,050
shares of Common Stock and, in January 1997, a warrant to purchase 5,000 shares
of Common Stock at an exercise price of $3.00 per share for five years
commencing January 1, 1997 to McLaughlin & Stern, LLP in consideration for legal
services.
On May 31, 1996, the Company issued warrants to purchase an aggregate of
1,335,000 shares of Common Stock at an exercise price of $1.51 per share, which
warrants are exercisable through May 31, 2001. The Company issued an aggregate
of 1,155,000 warrants in consideration for the warrant holders providing
personal guarantees of the Company's obligations to Bank One under a term loan
in the principal amount of $750,000 and for providing approximately $170,000 to
fund certain expenses in connection with the acquisition of Mr. Cataland's
shares in May 1996 and the private placement of the Company's Common Stock in
May 1996. The remaining 180,000 warrants were issued in consideration for
services rendered to the Company in connection with the change of control of the
Company in May 1996.
Pursuant to his employment agreement, the Company granted Mr. Frank Brown
options to purchase an aggregate of 700,000 shares of Common Stock, with an
exercise price of $1.375 per share with respect to 350,000 shares and an
exercise price of $2.125 per share with respect to 350,000 shares. 20% of these
options vest each year over a period of five years commencing June 1, 1997 and
are exercisable for five years after vesting. In the event that Mr. Brown's
employment contract is not renewed, he will only be entitled to exercise those
options which have vested as of the date of termination. The Company has issued
options to employees other than Mr. Brown to purchase an aggregate of 212,500
shares of Common Stock, 167,500 issued on August 8, 1996 at an exercise price of
$2.65 per share and 45,000 issued on March 27, 1997 at an exercise price of
$3.37 per share. 20% of the options with an exercise price of $2.65 per share
vest each year over a period of five
35
<PAGE>
years commencing on September 1, 1996 and are exercisable for five years after
vesting. 20% of the options with an exercise price of $3.37 per share vest each
year over a period of five years commencing on March 27, 1998 and are
exercisable for five years after vesting.
In November and December, 1996, the Company concluded a private placement of
3,163,911 shares of its Common Stock at $1.78 per share (for gross proceeds of
$5,631,761) to 57 accredited investors. In conjunction with such private
placement, the Company has issued to Burnham warrants to purchase 316,391 shares
of Common Stock in consideration for services rendered as placement agent in the
November Private Placement. The warrants are exercisable for a period of five
years from the date of issue at a price per share equal to $3.30, a price equal
to 110% of the closing bid price of the Company's shares as recorded on the NASD
Bulletin Board on the date of each closing under the November Private Placement.
Effective January 10, 1997, the Company issued 250,000 warrants to Mr. Bruce
Galloway, 100,000 warrants to Mr. George Koo and 50,000 warrants to Mr. Skuli
Thorvaldsson. The warrants are exercisable for a term of five years at an
exercise price of $3.00 per share. The warrants were issued for services
rendered in connection with the acquisition of MIE and represented the
reinstatement of 400,000 warrants previously issued to Mr. Galloway (with an
exercise price of $0.60 per share) which had expired in August 1995.
Neither the Company nor any person acting on its behalf offered or sold the
securities described above by means of any form of general solicitation or
general advertising. Each purchaser represented in writing that he acquired the
securities for his own account. A legend was placed on the certificates stating
that the restrictions on their transferability and sale. Each purchaser signed a
written agreement that the securities will not be sold without registration
under the Securities Act or exemption therefrom. The Registrant believes such
issuances are exempt transactions not involving a public offering under Section
4(2) of the Securities Act.
Item 5. Indemnification of Directors and Officers.
The Utah Revised Business Corporation Act of 1992 (the "Model Act") provides
that the statutory indemnification provisions are not exclusive and a
corporation, through its by-laws, may authorize indemnification in circumstances
that go beyond those permitted by statute, subject to certain limitations. The
Model Act does not, however, permit any indemnification to the director or
officer where: (a) amount of financial benefit received by director to which he
was not entitled; (b) intentional infliction of harm on corporation or
shareholders; (c) unlawful distribution; or (d) intentional violation of
criminal law. The Company's By-Laws provide for indemnification of officers and
directors for any action taken or failure to take action as the officer and/or
director so long as the officer and/or director reasonably believed that his
conduct was in, or not opposed to, the Company's best interests, and not in
violation of the Model Act.
36
<PAGE>
PART III
Item 1. Index to Exhibits.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Item 2. Description of Exhibits.
(a) Exhibits
3.1.1 *Registrant's Certificate of Incorporation
3.1.2 *Agreement and Plan of Reorganization and First Addendum dated December
5, 1983
3.1.3 *Certificate of Merger dated January 23, 1984
3.1.4 *Articles of Merger dated January 27, 1984
3.1.5 *Articles of Amendment to Articles of Incorporation dated January 27, 1984
3.1.6 *Amendment to Articles of Incorporation dated January 27, 1986
3.1.7 *Articles of Amendment to Articles of Incorporation dated June 28, 1996
3.2 *Registrant's Bylaws
4.1 *Form of Common Stock Certificate
4.2 *Certificate of Designation on Series A Preferred Stock
4.3 *Certificate of Designation on Series B Preferred Stock
10.1 *Purchase Agreement dated May 31, 1996 between James Cataland and
Registrant
Exhibits
*Exhibit A - Option Agreement (See Exhibit
10.16) *Exhibit B - Consulting Agreement
(See Exhibit 10.14)
Schedules
**Schedule A - States of Incorporation and
Qualification
1
<PAGE>
**Schedule B - Financial Statements
**Schedule C - Taxes **Schedule D Contracts
**Schedule E - Accounts Receivable
**Schedule F - Litigation **Schedule G
Conflicting Interests **Schedule H - Leases
**Schedule I - Franchises **Schedule J
Trademarks **Schedule K - Payroll Register
**Schedule L - Employment Contracts
**Schedule M - Insurance Policies
10.2 *Employment Agreement dated June 1, 1996 between R. Frank Brown and
Registrant
10.3 *Purchase Agreement dated November 27, 1996, between M.I.E. Hospitality
and Registrant
Schedules
**Schedule 1 Notice of Target Inter-Company Debt
**Schedule 1(b) Seller's Distribution Schedule (See
Exhibit 10.17)
**Schedule B Qualifications as Foreign Corporations
in Delaware, New Jersey, New York
**Schedule 2(a) Capital Stock Representations,
Exceptions, etc.
**Schedule 2(b) Exceptions to GAAP and Ordinary
Course of Business since September
30, 1996, etc.
**Schedule 2(c) Disclosure of Liabilities of M.I.E.
Hospitality Not Disclosed in Financial
Statements or Other Schedules
**Schedule 2(d) Exceptions to Tax Returns,
Representations and Warranties
**Schedule 2(e) List of assets owned or leased, etc.
2
<PAGE>
**Schedule 2(f) Exceptions to Usability and Salability
of Inventories
**Schedule 2(g) Contracts, Notices, Defaults, etc.
**Schedule 2(g)(5) Insurance policies and bonds
**Schedule 2(g)(6) Banks
**Schedule 2(g)(7) Interests in entities having been party
to transaction with M.I.E. in past 12
months
**Schedule 2(g)(8) Consents or approvals of third parties
required
**Schedule 2(g)(9) Accounts receivable aging schedule
**Schedule 2(i) Salary increases, contracts with
employees, agents, etc., and M.I.E.
benefit plans; M.I.E. payroll roster;
Collective Bargaining Agreements
**Schedule 2(k) Legal Actions
**Schedule 2(l) Patents and trademarks, licenses, etc.
**Schedule 2(m) List of Indemnification Given for
M.I.E. Hospitality for Patent,
Trademark or Copyright Infringement
**Schedule 2(o) Insurance Policies, see Schedule
2(g)(5)
**Schedule 2(p) Outstanding Loans or Advances or
Obligations to Make Loans or
Advances
**Schedule 2(r) Environmental
**Schedule 3(b) Consents required for performance by
Buyer
3
<PAGE>
**Schedule 3(d) Preferred Stock Rights and
Preferences
**Schedule 3(e) Buyer Financials
**Schedule 5 Consents and Release of Guarantees
Received by M.I.E. Hospitality
(Identified Leases)
**Schedule 5(i) Consents to Lease, etc., not received
**Schedule 7(e) Actual Knowledge (individuals)
**Schedule 12(i) Target Working Capital Statement
Exhibits
*Exhibit A M.I.E. Note (See Exhibit 10.8)
*Exhibit B Buyer Guaranty (See Exhibit 10.4)
*Exhibit C Buyer Note (See Exhibit 10.7)
**Exhibit 2(b) Balance Sheets and statements of
Income as of 12/31/95 and 9/30/96
**Exhibit D Form of Questionnaire
**Exhibit D-1 Responses to Questionnaire
*Exhibit E Escrow Agreement (See Exhibit 10.5)
*Exhibit F General Mutual Releases (See Exhibit
10.6)
10.4 *Guaranty Surety Agreement dated November 27, 1996 by Arthur Treacher's,
Inc.
10.5 *Escrow Agreement dated November 27, 1996 among Arthur Treacher's, Inc.
Seller and Brown Brothers Harriman & Co.
10.6 *Mutual Release Agreement dated November 27, 1996, among M.I.E.
Hospitality, Inc. and Magee Industrial Enterprises, Inc.
4
<PAGE>
10.7 *Promissory Note dated November 27, 1996 for $390,417 from M.I.E.
Hospitality, Inc. in favor of Magee Industrial Enterprises Inc.
10.8 *Promissory Note dated November 27, 1996 for $1,139,563 from M.I.E.
Hospitality, Inc in favor of Magee Industrial Enterprises, Inc.
10.9 *Uniform Franchise Offering Circular as of January 1, 1997
10.10 *Form of Franchise Agreement as of January 1, 1997
10.11 *Form of Warrant exercisable at $1.51 per share
10.12 *Form of Warrant to Burnham Securities, Inc.
10.13 *Form of Stock Option to Employees
10.14 *Consulting Agreement dated May 31, 1996 between James Cataland and
Registrant
10.15 *Termination Agreement dated May 31, 1996 between James Cataland and
Registrant
10.16 *Option Agreement dated March 29, 1996 between James Cataland and Skuli
Thorvaldsson
10.17 *Schedule 1(b) to the Purchase Agreement dated
November 27, 1996 between M.I.E. Hospitality and
Registrant .
10.18 *Form of agreement with holders of Series A Preferred Stock
11.1 *Statement of Computation of Per Share Earnings
21. *List of Subsidiaries
27. *Financial Data Schedules
* Previously Filed
** Not Included with Registration Statement
</TABLE>
5
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this amendment to the registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
ARTHUR TREACHER'S, INC.
(Registrant)
Date: August 8, 1997 By /s/ R. Frank Brown
--------------------
R. Frank Brown,
President, Chief Executive
Officer, Treasurer
6
<PAGE>
ARTHUR TREACHER'S INC. AND SUBSIDIARIES
INDEX TO PRO FORMA FINANCIAL INFORMATION AND HISTORICAL
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Page
ARTHUR TREACHER'S INC. CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED - INCLUDING M.I.E.
HOSPITALITY, INC.) - MARCH 30, 1997
Consolidated Balance Sheet as of March 30, 1997 F-3
Consolidated Comparative Statements of Operations for Periods
Ending March 30, 1997 and March 26, 1997 F-5
Consolidated Comparative Statements of Retained Earnings
(Deficit) for Periods Ending March 30, 1997 and
March 26, 1996 F-6
Consolidated Comparative Statements of Cash Flows for Periods
Ending March 30, 1997 F-7
Notes to Interim Consolidated Financial Statements F-8
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
Pro Forma Consolidated Statement of Operations for Nine Months
Ended March 30, 1997 F-11
Pro Forma Consolidated Statement of Operations for Fiscal
Year Ended June 30, 1996 F-12
Notes to Pro Forma Intermin Consolidated Statement of Operations F-13
ARTHUR TREACHER'S INC. AND SUBSIDIARIES FINANCIAL
STATEMENTS
Independent Auditiors' Report F-14
Consolidated Balance Sheets as of June 30, 1996 and 1995 F-15
Consolidated Statements of Operations for the fiscal years ended
June 30, 1996 and 1995 F-17
Consolidated Statements of Retained Earnings for the fiscal
years ended June 30, 1996 and 1995 F-18
Consolidated Statements of Cash Flows for the fiscal years ended
June 30, 1996 and 1995 F-19
Notes to Consolidated Financial Statements F-20
Independent Auditors' Report F-33
Consolidated Balance Sheets as of June 30, 1995 and 1994 F-34
Consolidated Statements of Operations for the fiscal years
ended June 30, 1995 and 1994 F-36
F-1
<PAGE>
Consolidated Statements of Retained Earnings for the fiscal
years June 30, 1995 and 1994 F-38
Notes to Consolidated Financial Statements F-39
M.I.E. HOSPITALITY, INC. FINANCIAL STATEMENTS
Independent Auditors' Report (Audited) F-50
Balance Sheet as of December 29, 1996 F-51
Statement of Operations for the year ended
December 29, 1996 F-53
Statement of Stockholders' Equity for the year
ended December 29, 1996 F-54
Statement of Cash flows for the year ended
December 29, 1996 F-55
Notes to Financial Statements F-56
(Unaudited)
Balance Sheet as of December 29, 1996 and December 31, 1995 F-62
Statement of Operations for the year ended
December 29, 1996 and December 31, 1995 F-64
Statement of Retained Earnings for the years
ended December 29, 1996 and December 31, 1996 F-65
Statement of Cash flows for the year ended
December 29, 1996 and December 31, 1995 F-66
Notes to Financial Statements F-67
</TABLE>
F-2
<PAGE>
ARTHUR TREACHER'S INC.
CONSOLIDATED BALANCE SHEETS
MARCH 30, 1997 and MARCH 26, 1996
ASSETS
1997 1996
(UNAUDITED) (UNAUDITED)
CURRENT ASSETS
Cash and short-term investments $1,739,272 $(927)
Deposits held in escrow 7,386 0
Accounts receivable, net of allowance
for doubtful accounts of $19,400 in
1997 169,614 167,749
Inventories 290,552 85,583
Prepaid Expenses 293,862 83,223
Note receivable - current portion 6,400 0
TOTAL CURRENT ASSETS 2,507,086 335,628
OTHER ASSETS
Security deposits 140,797 35,848
Note receivable net of current portion 6,176 0
Other 9,092 0
TOTAL OTHER ASSETS 156,065 35,848
PROPERTY AND EQUIPMENT, at cost
Land 129,889 0
Buildings 286,189 156,300
Equipment and Leasehold improvements 6,466,051 2,602,745
Vehicles 51,486 51,486
TOTAL PROPERTY AND EQUIPMENT 6,933,615 2,810,531
Less - accumulated depreciation 1,811,104 1,357,992
NET PROPERTY AND EQUIPMENT 5,122,511 1,452,539
$7,785,662 $1,824,015
================ ===========
F- 3
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
1997 1996
(UNAUDITED) (UNAUDITED)
CURRENT LIABILITIES
Accounts payable $1,231,535 $1,008,189
Accrued expenses 617,315 411,279
Current maturities of long-term debt 404,769 257,371
TOTAL CURRENT LIABILITIES 2,253,619 1,676,839
LONG-TERM DEBT, net of current portion 1,501,270 1,214,723
DEFERRED ROYALTY AND FRANCHISE FEES 6,568 79,459
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock 577,800 577,800
Common Stock 143,646 80,762
Paid-in-capital 8,813,133 2,183,748
Retained earnings (deficit) (5,510,374) (3,989,316)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 4,024,205 (1,147,006)
---------- -----------
$7,785,662 $1,824,015
=========== ===========
F- 4
<PAGE>
ARTHUR TREACHER 'S INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
July 1, 1996 July 1, 1995
through through
March 30, 1997 March 26, 1996
(UNAUDITED) (UNAUDITED)
TOTAL REVENUE $11,533,846 $5,949,071
TOTAL COSTS AND EXPENSES 11,947,913 6,386,300
DEPRECIATION AND AMORTIZATION 416,388 219,892
---------------
LOSS FROM OPERATIONS (830,455) (657,121)
TOTAL OTHER INCOME (EXPENSE) (308,428) (115,044)
NET LOSS $(1,138,883) $(772,165)
============== =============
NET LOSS PER COMMON SHARE ($0.09) ($0.10)
================== ===============
AVERAGE SHARES OUTSTANDING 12,918,496 8,076,200
============== ==========
</TABLE>
F- 5
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
ARTHUR TREACHER'S INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (DEFICIT)
FOR 9 MONTHS ENDING MARCH 30, 1997 and MARCH 26, 1996
Preferred stock Common Stock Paid-in Retained Subscription
Shares Amount Shares Amount Capital deficit) Receivable Total
-------------------- -------------- -------- ----------
BALANCE --
JUNE 30, 1995 577,800 $577,800 8,076,157 $80,762 $2,183,748 $(3,217,151) $(374,841)
Net loss (772,165) (772,165)
BALANCE --
MARCH 26, 1996 577,800 $577,800 8,076,157 $80,762 $2,183,748 $(3,989,316) 0 $(1,147,006)
BALANCE --
JUNE 30, 1996 577,800 $577,800 11,118,620 $111,186 $3,731,347 $(4,371,491) $(377,976) $(329,134)
Issuance of
common stock 3,246,000 32,460 5,081,786 377,976 5,492,222
Net loss (1,138,883) (1,138,883)
BALANCE --
MARCH 30, 1997 577,800 $577,800 14,364,620 $143,646 $8,813,133 $(5,510,374) 0 $4,024,205
</TABLE>
F- 6
<PAGE>
ARTHUR TREACHER'S INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 30, 1997 and MARCH 26, 1996
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,138,883) $(772,165)
Adjustments to reconcile net loss to net cash
used in operating activities :
Depreciation and amortization 416,388 219,892
Loss (gain) on sale of property and equipment 24,995 169,749
Provision for doubtful accounts
Changes in operating assets and liabilities:
Deposits held in escrow (2,319) 100
Accounts receivable 26,111 4,115
Notes receivable 1,910
Prepaid expenses and other assets (229,758) 79,764
Inventories (44,206) 4,465
Accounts payable 132,513 353,317
Accrued expenses and other liabilities (61,614) 168,043
Deferred federal income tax benefit 0 5,700
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES (874,863) 232,980
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (1,336,838) (460,330)
Purchase of subsidiary, net cash acquired of
$471,784 (1,778,216)
NET CASH USED IN INVESTING ACTIVITIES (3,115,054)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock 5,492,222
Proceeds from long term debt 226,711 413,352
Principal payments on long term debt (975,360) (213,014)
------------- ---------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 4,743,573 200,338
NET CHANGE IN CASH AND SHORT
TERM INVESTMENTS 753,656 (27,012)
Cash and short term investments at
beginning of periods 985,616 26,085
CASH AND SHORT TERM INVESTMENTS AT END
OF PERIODS $1,739,272 $(927)
======== ========
F- 7
<PAGE>
ARTHUR TREACHER'S, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 30, 1997
NOTE 1 - BASIS OF PRESENTATION
The accompanying interim unaudited financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission, and reflect all adjustments which, in the opinion of management, are
necessary to properly state the results of operations and financial position.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations although
management believes that the disclosures are adequate to make the information
presented not misleading. The results of operations are not necessarily
indicative of the results for the full year. These financial statements should
be read in conjunction with the financial statements and notes thereto included
in the Company's audited financial statements included in the Form 10-SB.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation: The interim consolidated financial statements
include the accounts of the company and its wholly-owned subsidiaries.
On November 27, 1996 Arthur Treacher's Inc. acquired MIE Hospitality, Inc., its
largest franchisee. MIE Hospitality, Inc., a wholly owned subsidiary, operates
32 Arthur Treacher Fish and Chip's restaurants in Pennsylvania, New York, New
Jersey and Delaware.
Arthur Treacher's Management Co., a wholly-owned subsidiary, provides
payroll services to the company.
Arthur Treacher's Advertising Co., a wholly-owned subsidiary, provides
certain advertising services to the company and the franchisee's.
NOTE 3 - ACQUISITION OF FRANCHISEE
On November 27, 1996 Arthur Treacher's Inc. purchased 100% of the common stock
of MIE Hospitality, Inc.( MIE ). The transaction has been accounted for as a
purchase and the results of operations have been included in the accompanying
financial statements from the date of acquisition forward. The purchase price of
$2,250,000 ( calculated as $1,631,563 in cash and $618,437 cash payment on
assumed debt) has been allocated entirely to the tangible net assets of MIE.
The allocation of the purchase
F- 8
<PAGE>
price to the net assets created a negative goodwill balance. In accordance with
generally accepted accounting principles the negative goodwill was allocated
proportionately to the non-current, non-monetary assets of the acquired entity.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
In the normal course of the Company's business, certain actions may be
filed against the Company, many of which the Company and its legal counsel, do
not believe warrant any merit. Such actions may prove to be meritorious,
however, and could result in settlements which could materially and severely
affect the financial condition, liquidity and operating results of the Company.
At March 30,1997, the Company has not made provisions for any such actions,
including the action discussed below. There can be no assurance that any actions
against the Company will be resolved in favor of the Company, nor that such
actions will be dismissed.
The Company is party to a legal action relating to its termination of a Regional
Representative agreement on the grounds that the agent breached the agreement by
assigning the agency agreement to a third party without consent of the Company .
The Regional Representative was under contract with the company to provide
various services to and on behalf of Arthur Treacher's for the franchisees, but
is not a franchise owner.
The Regional representative has filed a claim against the Company. The alleged
claim includes a "disagreement" between the parties, wrongful termination,
wrongful conversion of territories and misrepresentation made by Company
officials. The Company is vigorously defending against all of these allegations
and believes them to be without merit. The Regional representative seeks a
minimum of $2,750,000 in compensatory damages and $6,000,000 in punitive
damages.
Certain other legal claims are pending against the company but in the opinion of
management liabilities if any arising from such claims would not have a material
effect on the consolidated financial condition liquidity and operating results
of the Company.
At this time, management is not able to reasonably estimate the range of
any possible losses which may result from an unfavorable outcome of these
claims.
The Company has entered into an agreement with the former president and Chief
Executive Officer to provide consulting services to the Company at a rate of
$100,000 per year for two years, commencing June 1, 1996.
F- 9
<PAGE>
ARTHUR TREACHER'S, INC.
AND MIE HOSPITALITY, INC.
Proforma Interim Consolidated Statement of Operations
The following unaudited proforma interim consolidated statements of operations
reflect the acquisition of MIE Hospitality, Inc.( MIE ), as if the acquisition
had occurred on the dates presented on the Proforma Financial Statements. On
November 27, 1996 Arthur Treacher's Inc. purchased 100% of the common stock of
MIE .
The transaction has been accounted for as a purchase and the results of
operations have been included in the accompanying financial statements from the
date of acquisition forward. The total purchase price was $2,250,000 which was
allocated to the tangible net assets of MIE.
Such proforma information is based upon historical financial information
available from MIE for calendar year 1995 and 1996. The proforma interim
consolidated statement of operations should be read in conjunction with the
accompanying notes to the interim financial statements for the period presented
and with the audited consolidated financial statements of Arthur Treacher's Inc.
and the audited financial statements of M.I.E. Hospitality, Inc. for the most
recent years presented. These unaudited Proforma interim financial statements
reflect the consolidation of Arthur Treacher's Inc. and MIE Hospitality, Inc. as
of November 27, 1996.
These proforma statements of operations are not necessarily indicative of what
the actual results of operations of the company would have been assuming the
acquisition of MIE as set forth above, nor does it purport to represent the
results of future operations.
F- 10
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
ARTHUR TREACHER 'S INC.
and MIE HOSPITALITY, INC.
PROFORMA
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
FOR PERIODS ENDING
ARTHUR TREACHER 'S INC. ARTHUR TREACHER 'S INC.
and MIE HOSPITALITY, INC. MIE HOSPITALITY, INC. and MIE HOSPITALITY, INC.
( POST ACQUISITION ) ( PRE ACQUISITION ) PROFORMA
CONSOLIDATED PROFORMA
July 1, 1996 July 1, 1996 ADJUSTMENTS July 1, 1996
through through through
March 30, 1997 November 26, 1996 March 30, 1997
(UNAUDITED) (UNAUDITED) (UNAUDITED)
TOTAL REVENUE $11,533,846 $5,888,484 a)(55,000) $17,367,330
TOTAL COSTS AND
EXPENSES 11,947,913 5,268,757 a)(55,000) 17,161,670
DEPRECIATION AND
AMORTIZATION 416,388 271,070 681,838
-------------- --------------- ----------------- ---------------
INCOME (LOSS) FROM
OPERATIONS (830,455) 348,657 0 (476,178)
TOTAL OTHER INCOME
(EXPENSE) (308,428) 7,441 b) 51,318 (249,669)
--------------- ---------- ---------------- -------------
NET PROFIT (LOSS) $(1,138,883) $356,098 $51,318 $(725,847)
============ ================== =========== ===========
NET LOSS PER COMMON
SHARE $(0.09) $(0.06)
=============== =============
AVERAGE SHARES
OUTSTANDING 12,918,496 12,918,496
============ ===========
F- 11
<PAGE>
ARTHUR TREACHER'S INC
AND MIE HOSPITALITY INC
PROFORMA
CONSOLIDATED STATEMENT OF OPERATIONS
JULY 1, 1995 THROUGH JUNE 30, 1996
ARTHUR TREACHER'S INC. MIE HOSPITALITY INC. PROFORMA CONSOLIDATED
ADJUSTMENTS PROFORMA
July 1, 1995 July 1, 1995 July 1, 1995
through through through
June 30, 1996 June 30, 1996 June 30, 1996
( audited ) ( unaudited ) ( unaudited )
REVENUE
Sales $6,648,564 $14,999,299 $21,647,863
Franchise and
Other Income 1,228,296 a) (185,771) 1,042,525
Initial Franchise
Fees 1,050 1,050
TOTAL
REVENUE 7,877,910 14,999,299 (185,771) 22,691,438
COST OF SALES
and EXPENSES
Cost of Sales including
Occupancy 3,856,776 8,385,788 12,242,564
Operating Expenses 2,742,907 5,077,330 a) (185,771) 7,634,466
Franchise Service
and Selling Expense 876,584 876,584
General and
Administrative 1,097,350 1,255,144 2,352,494
Depreciation and
Amortization 290,120 621,556 911,676
TOTAL COST
and EXPENSES 8,863,737 15,339,818 (185,771) 24,017,784
NET (LOSS) FROM
OPERATIONS (985,827) (340,519) 0 (1,326,346)
OTHER INCOME (EXPENSE)
Interest expense (168,513) (215,196) b) 122,498 (261,211)
TOTAL OTHER INCOME
(EXPENSE) (168,513) (215,196) 122,498 (261,211)
NET LOSS $(1,154,340) $(555,715) $122,498 (1,587,557)
=============== ============== ========= ===========
NET LOSS PER
COMMON SHARE $(0.14) $(0.19)
===========
AVERAGE SHARES
OUTSTANDING 8,273,032 8,273,032
============ ===========
</TABLE>
F- 12
<PAGE>
ARTHUR TREACHER'S INC.
Notes to Proforma Interim Consolidated Statement of Operations
( UNAUDITED )
Adjustments to Proforma Interim Consolidated Statement of Operations:
a) To reflect a decrease in franchise royalty income by the franchisor and
a decrease in royalty expense from the former franchisee, on the acquisition of
MIE, a 32 restaurant franchisee of Arthur Treacher's Inc.
b) The reduction in interest expense due to the debt paydown per the
purchase agreement.
<PAGE>
To the Board of Directors
and Stockholders of
Arthur Treacher's, Inc. and subsidiaries
Report of Independent Auditors
We have audited the accompanying consolidated balance sheets of Arthur
Treacher's, Inc. and subsidiaries as of June 30, 1996 and 1995, and the related
consolidated statements of operations, retained earnings (deficit), and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Arthur
Treacher's, Inc. and subsidiaries as of June 30, 1996 and 1995, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended in conformity with generally accepted accounting
principles.
As discussed in Note 10 to the financial statements, certain errors
resulting in overstatement of previously recognized deferred tax benefits as of
June 30, 1996 were identified by management of the Company subsequent to
issuance of the 1996 financial statements. Accordingly, the accompanying June
30, 1996 financial statements have been restated to correct the error.
LYTKOWSKI & PEASE, INC.
September 20, 1996 (except for Note 10,
as to which the date is July 28, 1997)
F-14
<PAGE>
ARTHUR TREACHER'S, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND 1995
ASSETS
1996 1995
CURRENT ASSETS
Cash and short-term investments $ 985,616 $ 26,085
Deposits held in escrow 5,067 100
Accounts receivable, net of
allowance for doubtful accounts
of $39,000 in 1996 and $66,000
in 1995 147,122 171,864
Inventories 68,668 90,048
Prepaid expenses 34,867 172,200
TOTAL CURRENT ASSETS 1,241,340 460,297
OTHER ASSETS
Deposits 23,976 26,635
Other 14,534 5,700
TOTAL OTHER ASSETS 38,510 32,335
PROPERTY AND EQUIPMENT, at cost
Buildings 156,300 156,300
Furniture, fixtures and equipment 1,202,690 1,043,777
Leasehold improvements 1,404,295 1,334,551
Vehicles 51,486 43,221
TOTAL PROPERTY AND EQUIPMENT 2,814,771 2,577,849
Less - accumulated depreciation 1,424,317 1,195,999
NET PROPERTY AND EQUIPMENT 1,390,454 1,381,850
$2,670,304 $1,874,482
F-15
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
1996 1995
CURRENT LIABILITIES
Bank overdraft $ 45,336
Accounts payable $ 923,379 609,536
Accrued expenses and taxes withheld 514,555 258,030
Current maturities of long-term debt 1,056,202 300,917
TOTAL CURRENT LIABILITIES 2,494,136 1,213,819
LONG-TERM DEBT, net of current portion 458,923 970,839
DEFERRED ROYALTY AND FRANCHISE FEES 46,379 64,665
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock 577,800 577,800
Common stock 111,186 80,762
Paid-in-capital 3,731,347 2,183,748
Retained earnings (deficit) (4,371,491) (3,217,151)
48,842 (374,841)
Less - subscriptions receivable 377,976
TOTAL STOCKHOLDERS' EQUITY
(DEFICIT) (329,134) (374,841)
$2,670,304 $1,874,482
See notes to consolidated financial statements.
F-16
<PAGE>
ARTHUR TREACHER'S, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1996 AND 1995
1996 1995
REVENUE
Company-owned restaurant sales $6,648,564 $5,625,587
Franchise and royalty income 1,228,296 1,529,318
Initial franchise fees 1,050 63,550
TOTAL REVENUE 7,877,910 7,218,455
COSTS AND EXPENSES
Company-owned restaurants:
Cost of sales, including occupancy,
except depreciation 3,856,776 3,334,350
Operating expenses 2,742,907 2,381,255
Franchise service and selling expenses 876,584 1,060,986
General and administrative 1,097,350 704,616
Depreciation and amortization 290,120 172,028
TOTAL COSTS AND EXPENSES 8,863,737 7,653,235
LOSS FROM OPERATIONS (985,827) (434,780)
OTHER INCOME (EXPENSE)
Interest expense (168,513) (101,818)
TOTAL OTHER INCOME (EXPENSE) (168,513) (101,818)
LOSS BEFORE INCOME TAXES (1,154,340) (536,598)
INCOME TAX BENEFIT
Current 63,000
Deferred 83,600
TOTAL INCOME TAX BENEFIT 146,600
NET LOSS $(1,154,340) $ (389,998)
(LOSS) PER SHARE $ (.14) $ (.06)
Average Shares Oustanding 8,273,032 7,943,746
See notes to consolidated financial statements.
F-17
<PAGE>
ARTHUR TREACHER'S, INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (DEFICIT)
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Preferred Stock Common Stock Paid-in Retained Subscriptions
Shares Amount Shares Amount Capital (Deficit) Receivable Total
BALANCE -- JUNE 30, 1994 577,800 $577,800 7,916,157 $79,162 $2,105,348 $(2,827,153) $(64,843)
Issuance of common stock 160,000 1,600 78,400 80,000
Net loss (389,998) (389,998)
BALANCE -- JUNE 30, 1995 577,800 577,800 8,076,157 80,762 2,183,748 (3,217,151) (374,841)
Issuance of common stock 3,042,463 30,424 1,547,599 $(377,976) 1,200,047
Net loss (1,154,340) (1,154,340)
BALANCE -- JUNE 30, 1996 577,800 $577,800 11,118,620 $111,186 $3,731,347 $(4,371,491) $(377,976) $ (329,134)
</TABLE>
See notes to consolidated financial statements.
F-18
<PAGE>
ARTHUR TREACHER'S, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1996 AND 1995
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,154,340) $ (389,998)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 290,120 172,028
Loss (gain) on sale of property and equipment 95,112 (38,906)
Provision for doubtful accounts (28,943) 45,500
Changes in operating assets and liabilities:
Deposits held in escrow (4,967) 23,698
Accounts receivable 53,685 14,612
Notes receivable 30,826
Other assets 4,363 19,486
Prepaid expenses 127,294 76,660
Inventories 21,380 2,232
Accounts payable 268,006 176,070
Accrued expenses and other liabilities 237,438 (369,321)
Deferred federal income tax benefit (83,600)
TOTAL ADJUSTMENTS 734,388 69,285
NET CASH USED IN OPERATING
ACTIVITIES (90,852) (320,713)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposal of property 18,000 120,000
Purchase of property and equipment (410,230) (494,167)
NET CASH USED IN INVESTING
ACTIVITIES (392,230) (374,167)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock 1,200,047 80,000
Proceeds from long-term debt 490,852 1,104,886
Principal payments on long-term debt (248,286) (430,248)
Repayment of capital lease obligations (61,597)
NET CASH PROVIDED BY FINANCING
ACTIVITIES 1,442,613 693,041
NET CHANGE IN CASH AND SHORT -
TERM INVESTMENTS 959,531 (1,839)
Cash and short-term investments at beginning of year 26,085 27,924
CASH AND SHORT-TERM INVESTMENTS
AT END OF YEAR $ 985,616 $ 26,085
See notes to consolidated financial statements.
F-19
<PAGE>
ARTHUR TREACHER'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1995
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of the business: Arthur Treacher's, Inc. (the "Company")
operates twenty-five Arthur Treacher's Fish & Chips restaurants, of which
twenty-four are owned by the Company, in Ohio, Florida, Michigan, South Carolina
and New York. The Company is also a franchisor of 100 Arthur Treacher's Fish &
Chips restaurants located throughout the United States and Canada. Sales
(unaudited) of Arthur Treacher's Fish & Chips products through company-owned and
franchised restaurants totaled $43 million and $44 million for the years ended
June 30, 1996 and 1995, respectively.
During the year ended June 30, 1996, 4 locations were opened and 23
locations were closed or terminated. Additionally, 5 franchises were repurchased
by the Company and 1 corporate-owned restaurant was sold to a franchisee. During
the year ended June 30, 1995, 12 locations were opened and 25 locations were
closed or terminated. Additionally, 5 franchises were repurchased by the Company
and 1 corporate owned restaurant was sold to a franchisee.
The Company sells individual franchises. An individual franchise permits
the operation of a franchised Arthur Treacher's Fish & Chips restaurant. When an
individual franchise is sold, the Company assists the franchisee in site
selection, training personnel, implementation of an accounting and store
management system, and various other services. During the year ended June 30,
1996, the Company sold one individual franchise.
Arthur Treacher's Management Co., a wholly-owned subsidiary, provides
payroll services to the Company.
Arthur Treacher's Advertising Co., a wholly-owned subsidiary, provided
certain advertising services to the Company and the franchisees.
Principles of consolidation: The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany transactions have been eliminated in consolidation.
Financial instruments: Financial instruments which potentially subject the
Company to concentrations of credit risk consist principally of temporary cash
investments and receivables from franchisees. The Company generally does not
require collateral to secure its trade receivables and maintains a reserve for
potential credit losses.
F-20
<PAGE>
Property and equipment: Property and equipment are stated at cost.
Maintenance and repairs are charged to expense while expenditures for renewals
which prolong the lives of the assets are capitalized.
Depreciation is computed utilizing the straight-line method over the
estimated useful lives of the various assets. Leasehold improvements are
amortized by the straight-line method over the shorter of their estimated useful
lives or the term of the lease. The depreciation and amortization periods range
from one to sixteen years for leasehold improvements. Equipment and vehicles are
depreciated over 10 years and five years, respectively.
Depreciation expense approximated $290,000 and $172,000 for the years ended
June 30, 1996 and 1995, respectively.
Cash and cash equivalents: Cash and cash equivalents include cash and
short-term investments with original maturities of three months or less and
consist of checking accounts and a repurchase agreement with a local commercial
bank as described below.
At June 30, 1996, the Company had cash balances on deposit with a
commercial bank which exceeded the federally-insured deposit limit by
approximately $11,000.
At June 30, 1996, cash and short-term investments include a three-day
repurchase agreement with a commercial bank in the amount of $844,000. The
agreement matures on July 1, 1996, and is collateralized by FNMA securities held
by the bank with a fair market value of $844,000.
Inventories: Inventories, which consist primarily of food located at the
company-owned stores, are stated at the lower of cost (first-in, first-out
method) or market.
Franchise fees and royalty income: The Company recognizes initial franchise
fees from the sale of individual franchises as income when it has substantially
performed its obligations relating to such fees. For individual franchises, this
occurs at the commencement of operations by the franchisee. Amounts received
prior to this time ($24,000 and $0 at June 30, 1996 and 1995, respectively) are
recorded as deferred franchise fees until such services have been substantially
performed. Direct costs relating to franchise sales ($8,500 and $0 at June 30,
1996 and 1995, respectively) for which revenue has not yet been recognized are
deferred as prepaid expenses until the related revenue is recognized.
Initial franchise fees related to individual franchise sales totaled $1,050
and $63,000 for the years ended June 30, 1996 and 1995, respectively.
Generally, royalties are based on franchisee restaurant sales and are
accrued as revenue during the period in which the related franchisee restaurant
sales occur. Accounts receivable consist principally of amounts due from
franchisees for royalties.
Reacquired franchises: Costs associated with reacquiring franchise
locations are recorded as equipment, inventory and leaseholds to the extent that
the total does not exceed the fair market value of the assets acquired.
F-21
<PAGE>
If the Company's intention is to resell the reacquired franchise, the
franchise is carried at the lower of cost to the Company or estimated net
realizable value. If the Company's intention is to retain and operate the
franchise, costs pertaining to purchased rights are amortized over the
respective terms of the related agreements. Costs associated with the
reacquisition of franchise rights where the unit will be closed are charged to
operations.
Net loss per common share: The computation of loss per common share is
based on weighted average shares outstanding during the year and the exercise of
dilutive stock options and warrants, if any.
Reclassifications: Certain 1995 amounts have been reclassified to conform
to 1996 reporting classifications.
Use of estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Accounting pronouncements: In October 1995, the Financial Accounting
Standards Board ("FASB") issued Statement No. 123, "Accounting for Stock-Based
Compensation". This Statement establishes fair value accounting and reporting
standards for both stock-based employee compensation plans and transactions in
which an entity issues its equity to acquire goods or services. The accounting
requirements of this Statement are effective for transactions entered into
beginning July 1, 1996 and will have no impact on the accompanying financial
statements. Implementation of these new accounting standards could have a
material impact on future financial statements based upon stock-based
compensation arrangements entered into subsequent to June 30, 1996. The Company,
however, has not completed the complex analysis required to determine the impact
of the new Statement.
NOTE 2 -- ACCRUED EXPENSES AND TAXES WITHHELD
Accrued expenses and taxes withheld consist of the following at June 30,
1996 and 1995:
1996 1995
Sales tax payable $ 17,781 $ 20,451
Taxes other than income 85,436 103,976
Utilities 12,132 7,026
Interest 8,020
Other 174,386 (3,423)
Past due tax liabilities 216,800 130,000
$514,555 $258,030
The Company is presently negotiating with key tax authorities in an effort
to settle its outstanding obligations for past due tax liabilities and abate
penalties and interest.
F-22
<PAGE>
NOTE 3 -- LONG-TERM DEBT
Long-term debt consists of the following at June 30, 1996 and 1995:
1996 1995
Bank One, Cleveland $ 750,000 $ 750,000
Metropolitan Savings Bank 48,223 54,222
GMAC 31,137 19,909
Franchise acquisitions 497,510 344,169
Other 188,255 103,456
1,515,125 1,271,756
Less - current maturities 1,056,202 300,917
$ 458,923 $ 970,839
Notes payable - Bank One, Cleveland: In July 1994, the Company entered into
a $750,000 line of credit agreement with Bank One, Cleveland. Borrowings under
the line of credit bear interest at the bank's prime rate (8.25% at June 30,
1996) plus 2%, and 1/2% on the unused portion of the line. Interest only
payments commenced October 31, 1994 and are due quarterly thereafter. The line
of credit matures on December 1, 1996 (See Note 10). Borrowings under the line
are secured by accounts receivable, inventories, the unconditional and absolute
guarantee of the Company's former chief executive officer and certain majority
shareholders. The loan contains certain restrictive covenants including
restrictions on dividends, capital expenditures, and requires the Company to
maintain certain financial ratios.
Note payable - Metropolitan Savings Bank: The note payable to Metropolitan
Savings Bank was executed in December 1993 in the amount of $63,000, with
interest at the bank's prime rate (8.25% at June 30, 1996) plus 2%. The note
requires 60 monthly principal payments of $1,050. The loan is secured by and was
used to repurchase a store from a franchisee.
Notes payable - GMAC: The notes payable to GMAC represent various loans for
the purchase of vehicles. The notes bear interest at rates ranging from 9.5% to
12.7% per annum, and are payable in installments through December 2000. The
notes are secured by the vehicles purchased.
Notes payable - franchise acquisitions: The Company has entered into
financing arrangements with various franchisees for the repurchase of certain
franchise operations and equipment. The various borrowings require total monthly
payments of approximately $13,871 and bear interest at rates ranging from 8% to
12.5%. The notes mature at various dates through January 2003.
F-23
<PAGE>
Notes payable - other: The Company has converted certain past due trade
accounts payable to notes payable. The various borrowings require total monthly
payments of approximately $10,733 and bear interest at rates ranging from 8% to
10%. The notes mature at various dates through February 1998.
The aggregate maturities of outstanding long-term debt are as follows:
Year Ending June 30,
1997 $1,056,202
1998 144,000
1999 81,628
2000 90,120
2001 60,422
Thereafter 82,753
$1,515,125
The interest paid on all outstanding obligations for the years ended June
30, 1996 and 1995 totaled $160,493 and $80,700, respectively.
Based on current borrowing rates, the fair value of the above notes payable
approximate their carrying amount.
NOTE 4 -- LEASES
The Company is obligated under long-term operating lease arrangements for
its restaurants, certain leasehold improvements and automobiles, with remaining
terms ranging from 1 to 16 years. In addition, many of the leases contain
renewal options for periods of five to ten years and, in some instances,
purchase options.
Most of the leases are net leases under which the Company pays the taxes,
insurance, utilities, and maintenance costs. Certain leases provide for
additional annual rent based upon total gross revenues and increases in the
Consumer Price Index.
Rent expense for all operating leases, net of sublease income of $6,000 and
$15,500 in fiscal 1996 and 1995, respectively, including leases with terms of
less than one year, amounted to $791,321 and $671,000 for the years ended June
30, 1996 and 1995, respectively.
Amortization of leased assets is included in depreciation and amortization
expense.
F-24
<PAGE>
Future minimum lease payments under operating leases having remaining
noncancellable lease terms in excess of one year are as follows:
Year Ending June 30, Amount
1997 $ 645,000
1998 649,000
1999 640,000
2000 584,000
2001 569,000
Thereafter 1,314,000
Total minimum lease payments $4,401,000
In addition to the lease obligations described above, the Company also
conditionally guarantees the payment of certain lease obligations of franchisees
in the event the franchisee does not pay. At June 30, 1996, franchisee lease
obligations conditionally guaranteed by the Company total $1,954,000. In the
event the franchisee defaults, the Company retains the right to take back the
franchise unit and resell it, or operate the unit as a company owned restaurant.
NOTE 5 -- STOCKHOLDERS' EQUITY (DEFICIT)
The following is a summary of stockholders' equity (deficit) at June 30,
1996 and 1995:
1996 1995
Series A and B non-voting preferred stock, par
value $1.00 per share; authorized - 1996:
2,000,000 shares, 1995: 1,000,000 shares;
issued and outstanding - 577,800 shares $ 577,800 $ 577,800
Common stock, par value $0.01 per share,
authorized - 1996: 25,000,000 shares,
1995: 10,000,000 shares;
issued and outstanding - 1996: 11,118,620
shares, 1995: 8,076,157 shares 111,186 80,762
Paid-in-capital 3,731,347 2,183,748
Retained deficit (4,371,491) (3,217,151)
48,842 (374,841)
Less - subscription receivable 377,976
$ (329,134) $ (374,841)
In June 1996, the Company's shareholders authorized an increase in the
Company's authorized common stock to 25,000,000 (from 10,000,000) shares and
preferred stock to 2,000,000 (from 1,000,000) shares.
F-25
<PAGE>
During 1996, the Company completed the sale of 2,362,500 shares of its
authorized but restricted common stock in a private placement to an investment
group at prices ranging from $.60 to $.64 per share. Proceeds received by the
Company from the offering totaled $1,245,700, net of fees and expenses of
$239,300. The proceeds were used to repay certain corporate obligations,
repurchase certain franchise restaurants, test market new product developments,
and provide additional working capital for the Company. Additionally, in May
1996, the Company's majority shareholder, CEO and President, resigned and sold
2,000,000 shares of his common stock to an investment group for $1,200,000 and
other consideration. The Company has subsequently elected a new President and
CEO.
During June 1996, the Company sold 679,963 shares of its common stock by
subscription in a private placement for $377,976, net of fees and expenses of
$56,300. The proceeds were received in September 1996. The June 30, 1996 common
stock and paid-in capital information include the shares under subscription,
with a corresponding reduction in total shareholders' equity (deficit) for the
total subscriptions receivable.
In April 1995, in connection with the repurchase of two restaurants, the
Company issued 160,000 shares of its authorized common stock to the seller
In connection with the above private placements, certain individuals
elected to the Company's Board of Directors, acted as placement agents. The
individuals were paid a fee of $77,700 from the proceeds of the offering for
such services and were reimbursed $217,900 for the reimbursement of expenses
incurred in connection with the offering.
In June 1996, the Company issued an aggregate of 1,335,000 warrants to
certain individuals of the investment group (including the new Board of Director
members and other related parties) as additional compensation for services
provided in connection with the offering and in consideration for such
individuals providing personal guarantees of the Company's existing indebtedness
to Bank One in the amount of $750,000. Each warrant is exercisable to purchase
one share of the Company's common stock at an exercise price of $1.51 per share
(110% of the closing bid price of a share of common stock of the Company as
quoted on the NASDAQ Bulletin Board on the day of such grant).
In June 1996, pursuant to an employment agreement, the Company granted its
president and chief executive officer options to purchase an aggregate of
700,000 shares of it common stock, with an exercise price of $1.375 per share
with respect to 350,000 shares and an exercise price of $2.125 per share with
respect to 350,000. The options vest ratable over a period of five years
commencing June 1, 1997 and are exercisable for five years after vesting.
The non-voting preferred stock entitles the holders to cumulative
dividends, when and as declared by the Board of Directors, at an annual rate of
10% and a preference on liquidation of $1.00 per share. A certain class of
preferred stock may be redeemable at the option of the Company at par plus
declared, accrued and unpaid dividends and may be convertible, at any time, at
the option of the preferred
F-26
<PAGE>
stockholder, into common stock. If all preferred
shares were converted to common stock, a minimum of 587,555 common shares would
be issued.
Primary earnings per share amounts are computed based on the weighted
average number of shares actually outstanding, $8,273,032 in 1996 and $7,943,746
in 1995. Fully diluted earnings per share amounts are not presented for 1996 and
1995 because they are anti-dilutive.
F-27
<PAGE>
NOTE 6 -- INCOME TAXES
The benefit for income taxes for the year ended June 30, 1995 consists of
the following:
Current
Federal $(63,000)
State -0-
(63,000)
Deferred
Federal (83,600)
Tax benefit $(146,600)
The 1995 current tax benefit of $63,000 results from the carryback of the
current year's net operating loss against prior year's taxes paid. The
deferred tax beefit of $83,000 results principally from the temporary
differences between financial and tax reporting for depreciation, bad debts,
franchise fees and royalties and the adjustment of the existing reserve for
other estimated tax liabilities.
The reconciliation between income tax expense and a theoretical federal tax
rate computed by applying federal rates is as follows:
1996 1995
Theoretical Federal income tax rate of 30%
for 1996 and 28% for 1995 applied to
loss before income taxes $(346,300) $(183,300)
Increase (decrease) in taxes resulting
from:
Permanent differences between
tax and book basis 17,200 36,700
Increase in valuation allowance
for deferred tax asset resulting
from tax loss carryforward 329,100
Tax benefit $ -0- $(146,600)
F-28
<PAGE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets as of June 30, 1996 and 1995
are as follows:
1996 1995
Deferred tax liabilities:
Royalty fees $14,000 $ 33,534
Other 68,103 65,352
Total deferred tax liabilities 82,103 98,886
Deferred tax assets:
Depreciation 63,244 35,235
Bad debt allowance 10,892 17,482
Net operating loss carryforward 318,263 27,287
Other 51,791 51,869
444,190 131,873
Less - valuation allowance 356,387 27,287
Total deferred tax assets 87,803 104,586
Net deferred tax asset $ 5,700 $ 5,700
In connection with an Offer In Compromise and Collateral Agreement (the
"Agreement") entered into with the Internal Revenue Service in August 1992 to
settle approximately $700,000 of past due federal tax liabilities, the Company
has made payments to the IRS of $275,000 during the period 1992- 1994 and agreed
to waive future utilization of all net operating loss carryforwards generated
from losses sustained prior to June 30, 1992, to the extent that the tax
benefits waived do not exceed the amount of tax liabilities forgiven under the
Agreement. Additionally, the Agreement provides for potential additional future
payments through 1998 if certain net taxable income levels are achieved. The
total of all payments made under the Agreement, however, shall not exceed the
amount of federal tax liabilities waived under the Agreement, plus interest. At
June 30, 1992, net operating loss carryforwards approximated $3,000,000 and
expire at various times through the year 2005. Because the amount of net
operating loss carryforwards which may ultimately become available cannot be
estimated at this time, any future tax benefits resulting from the use of the
Company's potential net operating loss carryforward has not been recognized in
the accompanying financial statements and will be recognized at such time as the
tax benefit resulting from the loss carryforwards can be reasonably estimated by
the Company. No restrictions exist relating to utilization of net operating
losses generated in periods subsequent to June 30, 1992. Net operating loss
carryforwards generated subsequent to June 30, 1992 totaling approximately
$1,100,000 have not been recognized in the accompanying financial statements and
will be recognized at such time that realization of the benefit of such loss
carryforwards is considered by management to be more likely than not.
F-29
<PAGE>
NOTE 7 -- FRANCHISES PURCHASED
During 1996 and 1995, the Company purchased five restaurant units in each
year, from various franchisees. These transactions have been accounted for as
purchases, with the purchase price allocated as follows: 1996 1995
Furniture, fixtures and equipment $148,382 $202,800
Leaseholds 213,405 250,600
$361,787 $453,400
Consideration for the purchases consisted of the following:
1996 1995
Cash $ 1,825 $126,000
Debt forgiven 9,962 66,000
Notes payable 350,000 181,400
Common stock issued 80,000
$361,787 $453,400
NOTE 8 -- COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of the Company's business, certain actions may be
filed against the Company, many of which the Company and its legal counsel, do
not believe warrant any merit. Such actions may prove to be meritorious,
however, and could result in settlements which could materially and severely
affect the financial condition, liquidity and operating results of the Company.
At June 30, 1996, the Company has not made provisions for any such actions,
including the action discussed below. There can be no assurance that any actions
against the Company will be resolved in favor of the Company, nor that such
actions will be dismissed. The following actions are pending.
The Company is a party in certain legal actions relating to its termination
of the agency agreements of three Regional Representatives on the grounds of
non-performance and conduct detrimental to the Arthur Treacher's system. The
Regional Representatives were under contract with the Company to provide various
services to and on behalf of Arthur Treacher's for the franchisees, but were not
franchise owners. The Regional Representatives have each filed separate claims
against the Company, either as a counterclaim, complaint, or arbitration demand.
The claims alleged include "a disagreement" between the parties, wrongful
termination of the contracts, wrongful conversion of the territories and
misrepresentation made by Company officials. The Company is vigorously defending
against these allegations and believes them to be without merit. The claims
estimated damages averaging $5,000,000, principally resulting from the
assertions that the Regional Representatives lost future projected potential
profits.
F-30
<PAGE>
Certain other legal claims are pending against the Company but, in the
opinion of management, liabilities, if any, arising from such claims would not
have a material effect upon the consolidated financial condition, liquidity and
operating results of the Company.
At this time, management is not able to reasonably estimate the range of
any possible losses which may result from an unfavorable outcome of these
claims.
The Company has entered into an agreement with the Company's former
president and Chief Executive Officer to provide consulting services to the
Company at a rate of $100,000 per year for two years, commencing June 1996.
NOTE 9 -- SUBSEQUENT EVENTS
In September 1996, the Company modified its loan agreement with Bank One,
Cleveland and deposited a portion of the proceeds received from the equity
placement in the amount of $400,000 with the bank, as additional collateral to
secure the repayment of the debt more fully-described in Note 3.
During the ensuing period of July 1996 through September 1996, the Company
purchased six restaurants from various franchisees for consideration of cash,
forgiveness of debt, assumption of certain trade and notes payable and common
stock. One such restaurant was purchased on August 26, 1996, from an executive
of the Company for 22,000 restricted shares of common stock. This executive has
no continuing interest in this restaurant and continues to perform his duties as
a senior manager with the Company. Also, the Company franchised a previously
owned corporate restaurant on July 12, 1996, located in South Carolina. As a
result of the acquisition of six restaurants and the sale of one restaurant the
Company operates at 29 locations as of September 20, 1996.
From the period of June 1996 to September 1996, the Company received
$377,976 from a private placement of its common shares (See Note 5).
In August 1996, the Company issued options to employees, other than its
president, to purchase an aggregate od 167,500 shares of common stock at an
exercise price of $2.65 per share. Twenty percent of these options vest each
year over a period of five years commencing on September 1, 1996 and are
exercisable for five years after vesting.
F-31
<PAGE>
NOTE 10 -- RESTATEMENT OF DEFERRED TAXES
Subsequent to the issuance of the June 30, 1996 financial statements,
certain errors resulting in overstatement of previously recognized deferred tax
benefits at June 30, 1996 were identified by management of the Company.
Accordingly, the accompanying 1996 financial statements have been adjusted to
reduce the previously reported deferred tax asset and corresponding tax benefit.
The effect of this adjustment was to increase the retained earnings deficit and
1996 net loss by $329,100.
F-32
<PAGE>
To the Board of Directors
and Stockholders of
Arthur Treacher's, Inc. and subsidiaries
Report of Independent Auditors
We have audited the accompanying consolidated balance sheets of Arthur
Treacher's, Inc and subsidiaries as of June 30, 1995, and 1994, and the related
consolidated statements of operations, retained earnings (deficit), and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Arthur Treacher's, Inc. as of June 30, 1995 and 1994, and the consolidated
results of their operations and their consolidated cash flows for the years then
ended in conformity with generally accepted accounting principles.
Lytkowski & Pease, Inc.
July 31, 1996, except for Note 10 as to
which the date is September 13, 1996
Lytkowski & Pease, Inc.
Certified Public Accountants
8th Floor Annex, 1422 Euclid Avenue, Cleveland, Ohio 44115-1975 216-696-5394
F-33
<PAGE>
ARTHUR TREACHER'S, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1995 AND 1994
ASSETS
1995 1994
------------ --------
CURRENT ASSETS
Cash $ 26,085 $ 27,924
Deposits held in escrow 100 23,798
Accounts receivable, net of
allowance for doubtful accounts
of $66,000 in 1995 and $17,000
in 1994 171,864 231,876
Current portion of notes receivable 3,352
Inventories 90,048 92,280
Prepaid expenses 172,200 248,860
----------- -----------
TOTAL CURRENT ASSETS 460,297 628,090
OTHER ASSETS
Notes receivable from franchisees 27,474
Deposits 26,635 30,184
Deferred taxes 5,700
Other 15,937
---------- ------------
TOTAL OTHER ASSETS 32,335 73,595
PROPERTY AND EQUIPMENT, at cost
Buildings 156,300 296,343
Furniture, fixtures and equipment 1,043,777 908,799
Leasehold improvements 1,334,551 1,137,260
Vehicles 43,221 43,221
----------- ------------
TOTAL PROPERTY AND EQUIPMENT 2,577,849 2,385,623
Less - accumulated depreciation 1,195,999 1,244,299
---------- -----------
NET PROPERTY AND EQUIPMENT 1,381,850 1,141,324
---------- -----------
$1,874,482 $1,843,009
========== ==========
F-34
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
1995 1994
------------ --------
CURRENT LIABILITIES
Bank overdraft $ 45,336 $
Accounts payable 609,536 478,802
Accrued expenses and taxes withheld 258,030 501,070
Current maturities of debt and
capital leases 300,917 176,234
----------- -----------
TOTAL CURRENT LIABILITIES 1,213,819 1,156,106
LONG-TERM DEBT, net of current portion 970,839 414,183
CAPITAL LEASE OBLIGATIONS, net of current
portion 50,779
DEFERRED FEDERAL INCOME TAX 77,900
OTHER LONG-TERM OBLIGATIONS 62,443
DEFERRED ROYALTY AND FRANCHISE FEES 64,665 146,441
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock 577,800 577,800
Common stock 80,762 79,162
Paid-in-capital 2,183,748 2,105,348
Retained earnings (deficit) (3,217,151) (2,827,153)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY
(DEFICIT) (374,841) (64,843)
$1,874,482 $1,843,009
========== ==========
See notes to consolidated financial statements
F-35
<PAGE>
ARTHUR TREACHER'S, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1995 AND 1994
1995 1994
------------ --------
REVENUE
Company-owned restaurant sales $5,625,587 $5,638,133
Franchise and royalty income 1,529,318 1,980,760
Initial franchise fees 63,550 1,068,500
----------- -----------
TOTAL REVENUE 7,218,455 8,687,393
COSTS AND EXPENSES
Company-owned restaurants -
Cost of sales, including occupancy,
except depreciation 3,334,350 3,260,573
Operating expenses 2,381,255 2,498,566
Franchise service and selling expenses 1,060,986 1,795,884
General and administrative 803,713 837,061
Depreciation and amortization 172,028 192,649
Corporate relocation costs 66,840
-------------- ------------
TOTAL COSTS AND EXPENSES 7,752,332 8,651,573
---------- -----------
(LOSS) INCOME FROM OPERATIONS (533,877) 35,820
OTHER INCOME (EXPENSE)
Interest expense (101,818) (91,661)
Other - net 99,097 113,582
----------- -----------
TOTAL OTHER (EXPENSE) INCOME (2,721) 21,921
----------- ------------
(LOSS) INCOME BEFORE INCOME TAXES (536,598) 57,741
INCOME (TAXES) BENEFIT
Current 63,000 (63,000)
Deferred 83,600 33,600
------ ------
TOTAL INCOME (TAXES) BENEFIT 146,600 (29,400)
------- --------
NET (LOSS) INCOME $ (389,998) $ 28,341
============= ========
NET LOSS PER COMMON SHARE $ (.06) $ -
AVERAGE SHARES OUTSTANDING 7,943,746 7,582,824
========= =========
See notes to consolidated financial statements.
F-36
<PAGE>
ARTHUR TREACHER'S, INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (DEFICIT)
FOR THE YEARS ENDED JUNE 30, 1995 AND 1994
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Preferred Stock Common Stock Paid-in Retained
Shares Amount Shares Amount Capital (Deficit) Total
------- -------- ---------- -------- ---------- ----------- -------
BALANCE --
JUNE 30, 1993 585,800 $585,800 5,916,157 $59,162 1,125,348 $(2,855,494) (1,085,184)
Issuance of common
stock 2,000,000 20,000 980,000 1,000,000
Retirement of
preferred stock (8,000) (8,000) (8,000)
Net income 28,341 28,341
---------- --------------- ----------------------------------- ------------- ---------
BALANCE --
JUNE 30, 1994 577,800 577,800 7,916,157 79,162 2,105,348 (2,827,153) (64,843)
Issuance of common
stock 160,000 1,600 78,400 80,000
Net loss (389,998) (389,998)
----------------- -------------- ----------------- -------------- ------------- ------------
BALANCE --
JUNE 30, 1995 577,800 $577,800 8,076,157 $80,762 $2,183,748 $(3,217,151) $ (374,841)
======= ======== ========= ======= ========== =========== ==========
</TABLE>
See notes to consolidated financial statements.
F-37
<PAGE>
ARTHUR TREACHER'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1994
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of the business: Arthur Treacher's, Inc. (the "Company") operates
twenty-six Arthur Treacher's Fish & Chips restaurants, of which twenty-three are
owned by the Company, in Ohio, Florida, Michigan, South Carolina and New York.
The Company is also a franchisor of 122 Arthur Treacher's Fish & Chips
restaurants located throughout the United States and Canada. Sales (unaudited)
of Arthur Treacher's Fish & Chips products through company-owned and franchised
restaurants totaled $44 million and $42 million for the years ended June 30,
1995 and 1994, respectively.
During the year ended June 30, 1995, 12 locations were opened and 25
locations were closed or terminated. Additionally, 5 franchises were repurchased
by the Company and 1 corporate-owned restaurant was sold to a franchisee.
The Company sells Area Development Agreements and individual franchises. An
Area Development Agreement provides a representative with the right to act as
exclusive agent for the marketing and supervision of individual franchises for
and on behalf of the Company, and to locate and recruit potential franchisees to
own and operate Arthur Treacher's franchises within a specific development
territory. The Company provides the Area Development representative a general
program orientation, training and advisory assistance. An individual franchise
permits operation of a franchised Arthur Treacher's Fish & Chips restaurant
unit. When an individual franchise is sold, the Company assists the franchisee
in site selection, training personnel, implementation of an accounting and store
management system, and various other services. During the year ended June 30,
1995 no Area Development Agreements were sold. During the year ended June 30,
1994 two Area Development Agreements were sold.
Arthur Treacher's Management Company, a wholly-owned subsidiary, provides
payroll and employee benefit services to certain members of the franchise
network. Arthur Treacher's Advertising Co., a wholly-owned subsidiary, provides
certain advertising services to the franchisees.
Principles of consolidation: The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany transactions have been eliminated in consolidation.
Property and equipment: Property and equipment is stated at cost, except for
capitalized leases which are recorded at the lesser of fair value or the
discounted present value of the minimum lease payments.
F-38
<PAGE>
Maintenance and repairs are charged to expense while expenditures for
renewals which prolong the lives of the assets are capitalized.
Depreciation is computed utilizing the straight-line method over the
estimated useful lives of the various assets. Capital leases and leasehold
improvements are amortized by the straight-line method over the shorter of their
estimated useful lives or the term of the lease. The depreciation and
amortization periods range from one to sixteen years for buildings and leasehold
improvements. Equipment and vehicles are depreciated over ten years and five
years respectively.
Depreciation expense totaled $172,000 and $195,000 for the years ended June
30, 1995 and 1994, respectively.
Inventories: Inventories, which consist primarily of food located at the
company-owned stores, are stated at the lower of cost (first-in, first-out
method) or market.
Franchise fees and royalty income: The Company recognizes initial franchise fees
from the sale of Area Development Agreements and individual franchises as income
when it has substantially performed its obligations relating to such fees. For
Area Development Agreement sales, this occurs when substantially all training
and orientation has been provided and, for individual franchises, at the
commencement of operations by the franchisee. Amounts received prior to this
time ($0 and $146,441 at June 30, 1995 and 1994, respectively) are recorded as
deferred franchise fees until such services have been substantially performed.
Direct costs relating to franchise sales ($0 and $93,370 at June 30, 1995 and
1994, respectively) for which revenue has not yet been recognized are deferred
as prepaid expenses until the related revenue is recognized.
Initial franchise fees related to the sale of Area Development Agreements
totaled $0 and $101,500 for the years ending June 30, 1995 and 1994,
respectively. Individual franchise sales totaled $63,000 and $967,000 for the
years ended June 30, 1995 and 1994, respectively.
Generally, royalties are based on franchisee restaurant sales and are
accrued as revenue during the period in which the related franchisee restaurant
sales occur.
Reacquired franchises: Costs associated with reacquiring a franchise location
are recorded as equipment inventory to the extent that the total does not exceed
the fair market value of the assets acquired.
If the Company's intention is to resell the reacquired franchise, the
franchise is carried at the lower of cost to the Company or estimated net
realizable value. If the Company's intention is to retain and operate the
franchise, costs pertaining to purchased rights are amortized over the
respective terms of the related agreements. Costs associated with the
reacquisition of franchise rights where the unit will be closed are charged to
operations.
Net loss per common share: The computation of loss per common share is based on
average shares outstanding during the year.
Reclassifications: Certain 1994 amounts have been reclassified to conform
to 1995 reporting classifications.
F-39
<PAGE>
Use of estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE 2 -- INVESTMENTS IN LIMITED PARTNERSHIPS
At June 30, 1993, the Company was the general partner in two limited
partnerships formed to acquire and operate Arthur Treacher's Fish & Chips
restaurant franchises. The Company's capital contribution to the partnerships
consisted of certain franchise rights. The investments were accounted for on the
cost basis. During 1994 the Company bought out the limited partners of the two
limited partnerships. One store is now operated by the Company and the other was
resold to a third party.
NOTE 3 -- ACCRUED EXPENSES AND TAXES WITHHELD
Accrued expenses and taxes withheld consist of the following at June 30,
1995 and 1994:
1995 1994
---------- ------
Sales tax payable $ 20,451 $ 16,983
Taxes other than income 103,976 51,076
Income taxes 63,000
Wages and salaries 21,163
Utilities 7,026 7,027
Other (3,423) 40,025
Past due tax liabilities 130,000 301,796
-------- --------
$258,030 $501,070
======== ========
Because of significant operating losses and cash flow deficits incurred in
prior years, the Company remains delinquent on certain tax liabilities for
periods from 1986 through February 1988. The delinquency includes substantial
penalties and interest. In October 1994, the Company settled with one government
agency for approximately $120,000 and is presently renegotiating with other key
tax authorities in an effort to settle the remaining outstanding obligations and
abate penalties and interest.
All current taxes have been paid on a timely basis since March 1988.
In August 1992, the Internal Revenue Service accepted the Company's Offer
In Compromise relating to all past due federal tax liabilities. Under the terms
of the agreement, the Company has agreed to pay $275,000, $135,000 of which was
paid in 1992 with the balance of $140,000 being paid in monthly installments of
$4,620, (including interest at 8%) which began in October 1992. Payments to be
made under the agreement during fiscal 1995 are included in past due liabilities
at June 30, 1994, with the balance ($62,443) classified as other long-term
obligations. In July 1994 the Company paid off the obligation with borrowings
from the Company's line of credit.
F-40
<PAGE>
As a part of the Offer In Compromise, the Company also executed a
Collateral Agreement with the Internal Revenue Service providing for potential
additional future payments at certain net taxable income levels through 1998 and
waivers of operating loss carryforwards. The total of such potential additional
payments shall not exceed amounts waived, plus interest, under the Offer In
Compromise. Additionally, in March 1988, the Internal Revenue Service filed tax
liens against substantially all of the Company's assets. Upon payment of the
outstanding balance under the Offer In Compromise in July 1994 these liens were
released.
NOTE 4 -- LONG-TERM DEBT
Long-term debt, excluding capital lease obligations, consists of the
following at June 30, 1995 and 1994:
1995 1994
------------ ------
Society National Bank $ $ 82,857
Monarch/Sky Brothers, Inc. 198,808
Metropolitan Savings Bank 54,222 59,591
Bank One, Cleveland 750,000
GMAC 19,909 29,143
Franchise acquisitions 447,625 211,078
---------- --------
1,271,756 581,477
Less - current maturities 300,917 167,294
---------- --------
TOTAL LONG-TERM DEBT $ 970,839 $414,183
========= ========
Note payable - Society National Bank: The note payable to Society National Bank
represents the amendment and restatement of two term notes with the bank. The
note, amended in July 1992, required monthly principal and interest payments of
$3,458 with a balloon payment of the remaining outstanding balance in July 1993,
with interest at the bank's prime rate (9% at June 30, 1995) plus 1%. In
September 1993, the Bank extended the note until August 1, 1994 on the same
terms and conditions as the existing loan. The loan was repaid in full in July
1994 with the proceeds from the note payable - Bank One, more fully discussed
below.
Note payable - Monarch/Sky Brothers, Inc.: The note payable to Monarch/Sky
Brothers, Inc. (the Company's principal supplier of food products) represents a
$338,808 term note executed September 1991. Interest was payable at the prime
interest rate plus 1%. A principal payment of $50,000 was made in February 1994,
with the remaining balance paid off in July 1994 with the proceeds from the note
payable - Bank One, more fully discussed below.
Note payable - Metropolitan Savings Bank: The note payable to Metropolitan
Savings Bank was executed in December 1993 in the amount of $63,000, with
interest at the bank's prime rate (9% at JuneE30, 1995) plus 2%. The note
requires 60 monthly principal payments of $1,050 plus interest. The loan is
secured by and was used to repurchase a store from a franchisee.
F-41
<PAGE>
Notes payable - Bank One, Cleveland: In July 1994, the Company entered into a
$750,000 line of credit agreement with Bank One, Cleveland. Borrowings under the
line of credit bear interest at the bank's prime rate (9% at June 30, 1995) plus
2%, and 1/2% on the unused portion of the line. Interest only payments commenced
October 31, 1994, and quarterly thereafter. The line of credit matures on
December 1, 1996. Borrowings under the line are secured by accounts receivable,
inventories, the unconditional and absolute guarantee of the Company's chief
executive officer and certain shareholders. The loan contains certain
restrictive covenants including restrictions on dividends, capital expenditures
and requirements for the Company to maintain certain financial ratios.
Borrowings under the line of credit in July 1994 were used principally to
repay indebtedness on existing corporate obligations, including amounts due the
Internal Revenue Service for past due tax liabilities.
Notes payable - GMAC: The notes payable to GMAC represent various loans for the
purchase of vehicles. The notes bear interest at rates ranging from 9.5% to
12.7% per annum, and are payable in 36 monthly installments through July 1998.
The notes are secured by the vehicles purchased.
Notes payable - franchise acquisitions: The Company has entered into financing
arrangements with various franchisees for the repurchase of certain franchise
operations and equipment. The various borrowings require total monthly payments
of approximately $24,088 and bear interest at rates ranging from 7.5% to 11.5%.
The notes mature at various dates through October 2000.
The aggregate maturities of outstanding long-term debt are as follows:
Year Ending June 30,
1996 $ 300,917
1997 250,185
1998 214,261
1999 175,406
2000 177,158
Thereafter 153,829
-----------
$1,271,756
Total interest paid on all outstanding obligations for the years ended June
30, 1995 and 1994 totaled $80,700 and $91,700, respectively.
NOTE 5 -- LEASES
The Company is obligated under both capital and long-term operating lease
arrangements for its restaurants, certain leasehold improvements and
automobiles, with remaining terms ranging from 1 to 16 years. In addition, many
of the leases contain renewal options for periods of five to ten years and, in
some instances, purchase options.
Most of the leases are net leases under which the Company pays the taxes,
insurance, utilities, and maintenance costs. Certain leases provide for
additional annual rents based upon total gross revenues and increases in the
Consumer Price Index.
F-42
<PAGE>
Rent expense for all operating leases, net of sublease income of $15,500
and $30,000 in 1995 and 1994, respectively, including leases with terms of less
than one year, amounted to $671,000 and $470,000 for the years ended JuneE30,
1995 and 1994, respectively.
During 1995 there was no property and equipment under capitalized leases.
Property and equipment included the following amounts for leases that had been
capitalized at June 30, 1994:
1994
Buildings $296,343
Furniture, fixtures and equipment 19,223
315,566
Less - allowance for amortization 215,848
--------
$ 99,718
Amortization of leased assets is included in depreciation and amortization
expense.
Future minimum lease payments under operating leases having remaining
noncancellable lease terms in excess of one year are as follows:
Year Ending June 30, Amount
1996 $ 740,000
1997 749,000
1998 734,000
1999 730,000
2000 678,000
Thereafter 1,818,000
----------
Total minimum lease payments $5,449,000
In addition to the lease obligations described above, the Company
also conditionally guarantees the payment of certain lease obligations of
franchisees in the event the franchisee does not pay. At June 30, 1995,
franchisee lease payments conditionally guaranteed by the Company total
$2,872,000. In the event the franchisee defaults, the Company retains the right
to take back the franchise unit and resell it, or operate the unit as a company
restaurant. Accordingly, the Company does not anticipate any losses related to
these guarantees.
F-43
<PAGE>
NOTE 6 -- STOCKHOLDERS' EQUITY (DEFICIT)
The following is a summary of stockholders' equity (deficit) at June 30,
1995 and 1994:
1995 1994
------------ ---------
Series B non-voting preferred
stock, par value $1.00 per share,
1,000,000 shares authorized; issued
and outstanding: 577,800 shares $ 577,800 $ 577,800
Common stock, par value $0.01 per
share, 10,000,000 shares authorized;
issued and outstanding: 1995: 8,076,157
shares, 1994: 7,916,157 shares 80,762 79,162
Paid-in-capital 2,183,748 2,105,348
Retained (deficit) (3,217,151) (2,827,153)
---------- -----------
$ (374,841) $ (64,843)
========== ===========
The Series B non-voting preferred stock entitles the holders to cumulative
dividends at an annual rate of 10%. Common stock dividends may not be paid
unless provision has been made for payment of preferred dividends. At June 30,
1995, approximately $400,000 of preferred stock dividends were accrued and
unpaid. The preferred stock is callable at the option of the Company at par plus
accrued and unpaid dividends and is convertible, at any time, at the option of
the preferred stockholder, into common stock at various conversion rates
depending on the length of time the stock has been held. Any common shares
issued pursuant to conversion must be registered under federal security laws
within nine months of the exercise date. In September 1993, 8,000 shares of
preferred stock were repurchased at par value.
In August 1993, the Company sold 2,000,000 shares of its authorized but
unissued common stock in a private placement to an investment group. Proceeds
received from the offering totaled $1,000,000. The proceeds of the equity
placement were used to repay certain corporate obligations, including a portion
of the past due tax liabilities discussed in Note 3, with the balance of the
proceeds used for restaurant expansion and general corporate purposes. The
Company also issued warrants to purchase 400,000 shares of the Company's common
stock to the same investor group. The warrants were exercisable at the holder's
option through August 1995. The exercise price was $.50 per share through August
1994 and is $.60 per share thereafter. No warrants were exercised and have
expired.
In April 1995, in connection with the repurchase of two restaurants, the
Company issued 160,000 shares of its authorized common stock to the seller.
F-44
<PAGE>
NOTE 7 -- INCOME TAXES
The (benefit) expense for income taxes consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Year Ended June 30
1995 1994
Current:
Federal $(63,000) $63,000
Deferred:
Federal (83,600) (33,600)
----------- ---------
$(146,600) $29,400
</TABLE>
The reconciliation between income tax expense and a theoretical federal tax
rate computed by applying federal rates is as follows:
Year Ended June 30
1995 1994
Theoretical federal income tax rate of 28% for 1995
and 28% applied to loss (income) before
income taxes $(183,300) $16,170
Increase (decrease) in taxes resulting from:
Permanent differences between
tax and book basis 36,700 13,230
-------- -------
Tax (benefit) expense $(146,600) $(29,400)
========= ========
The 1995 current tax benefit of $63,000 results from the carryback of the
1995 operating loss aganst prior year's taxes paid. The deferred
tax benefit of $83,600 results principally from temporary differences between
financial and tax reporting for depreciation, bad debts, franchise fees and
royalties and the adjustment of the existing reserve for other estimated tax
liabilities.
The 1994 current tax expense of $63,000 represents estimated taxes due
based upon currently taxable income. The deferred tax benefit of $33,600 in 1994
results principally from temporary differences between financial and tax
reporting for depreciation, bad debts, franchise fees and royalties.
Significant components of the Company's deferred tax liabilities and
assets as of June 30, 1995 and 1994 are as follows:
1995 1994
-------- ------
Deferred tax liabilities:
Royalty fees $33,534 $ 25,800
F-45
<PAGE>
TABLE CONTINUED-
Bad debt allowance -0- 10,890
Other 65,352 65,303
Total deferred tax liabilities 98,886 101,993
Deferred tax assets:
Depreciation 35,235 8,055
Bad debt allowance 17,482 -0-
Net operating loss carryforward 27,287 -0-
Other 51,869 16,038
-------- -------
131,873 24,093
Less - valuation allowance 27,287 -0-
-------- -----
Total deferred tax asset (liability) 104,586 24,093
-------- -------
Net deferred tax asset (liability) $ 5,700 $(77,900)
======= =========
In connection with an Offer In Compromise and Collateral Agreement (the
"Agreement") entered into with the Internal Revenue Service in August 1992 to
settle approximately $700,000 of past due tax liabilities, the Company has made
payments to the IRS of $275,000 during the period 1992-1994 and agreed to waive
future utilization of all net operating loss carryforwards generated from losses
sustained prior to June 30, 1992, to the extent that the tax benefits waived do
not exceed the amount of tax liabilities forgiven under the Agreement.
Additionally, the Agreement provides for potential additional future payments
through 1998 if certain net taxable income levels are achieved. The total of all
payments made under the Agreement, however, shall not exceed the amount of
federal tax liabilities waived under the Agreement, plus interest. At June 30,
1992, net operating loss carryforwards approximated $3,000,000 and expire at
various times through the year 2005. Because the amount of net operating loss
carryforwards which may ultimately become available cannot be estimated at this
time, any future tax benefits resulting from the use of the Company's potential
net operating loss carryforward has not been recognized in the accompanying
financial statements and will be recognized at such time as the tax benefit
resulting from the loss carryforwards can be reasonably estimated by the
Company. No restrictions exist relating to utilization of net operating losses
generated in periods subsequent to June 30, 1992.
F-46
<PAGE>
NOTE 8 -- FRANCHISES PURCHASED
During 1995 and 1994, the Company purchased five and seven restaurant
units, respectively, from various franchisees. These transactions have been
accounted for as purchases, with the purchase price allocated as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1995 1994
---------- -------
Furniture, fixtures and equipment $202,800 $186,400
Leaseholds 250,600 187,400
-------- --------
$453,400 $373,800
Consideration for the purchases consisted of the following:
1995 1994
---------- -------
Cash $126,000 $ 71,400
Debt forgiven 66,000 83,100
Notes payable 181,400 169,800
Area development rights assigned 49,500
Common stock issued 80,000
---------
$453,400 $373,800
</TABLE>
The Company is presently operating all the units except one, which was
resold to a franchisee in fiscal 1994.
NOTE 9 -- CONTINGENT LIABILITIES
In the normal course of the Company's business, certain actions may be
filed against the Company, many of which the Company and its legal counsel, do
not believe warrant any merit. Such actions may prove to be meritorious,
however, and could result in settlements which could materially and severely
affect the financial condition, liquidity and operating results of the Company.
At June 30, 1995, the Company has not made provisions for any such actions,
including the action discussed below. There can be no assurance that any actions
against the Company will be resolved in favor of the Company, nor that such
actions will be dismissed.
The Company is a party in certain legal actions relating to its termination
of the agency agreements of three Regional Representatives on the grounds of
non-performance and conduct detrimental to the Arthur Treacher's system. The
Regional Representatives were under contract with
F-47
<PAGE>
the Company to provide various services to and on behalf of Arthur Treacher's
for the franchisees, but were not franchise owners.
The Regional Representatives have each filed separate claims against the
Company, either as a counterclaim, complaint, or arbitration demand. The claims
alleged include "a disagreement" between the parties, wrongful termination of
the contracts, wrongful conversion of the territories and misrepresentation made
by Company officials. The Company is vigorously defending against these
allegations and believes them to be without merit. The claims allege estimated
damages averaging $5,000,000, principally resulting from the assertions that the
Regional Representatives lost future projected potential profits.
Certain other legal claims are pending against the Company but, in the
opinion of management, liabilities, if any, arising from such claims would not
have a material effect upon the consolidated financial condition, liquidity and
operating results of the Company.
F-48
<PAGE>
At this time, management is not able to reasonably estimate the range of any
possible losses which may result from an unfavorable outcome of these claims.
NOTE 10 - SUBSEQUENT EVENTS
In June 1996, the Company's shareholders authorized an increase in the
Company's authorized common stock to 25,000,000 (from 10,000,000) shares and
preferred stock to 2,000,000 (from 1,000,000) shares.
During the period May through September 1996, the Company completed the
sale of 3,042,463 shares of its authorized but unissued common stock in a
private placement to an investment group at prices ranging from $.60 to $.64 per
share. Proceeds received by the Company from the offering totaled $1,623,700,
net of placement fees of $77,700 and expenses of $217,900. The proceeds were
used to repay certain corporate obligations, repurchase certain franchisee
restaurants, test market new product developments, and provide additional
working capital for the Company. Additionally, the Company's majority
shareholder, CEO and president resigned and sold 2,000,000 shares of his common
stock to an investment group for $1,200,000 and other consideration. The Company
has subsequently elected a new president and CEO. The Company has also entered
into an agreement with the former president and CEO to provide consulting
services to the Company at the rate of $100,000 per year for two years
commencing June 1996.
In connection with the above private placement, certain individuals
subsequently elected to the Company's Board of Directors acted as placement
agents. The individuals were paid a fee of $77,700 from the proceeds of the
offering for such services and were reimbursed $217,900 for the reimbursement of
expenses incurred in connection with the offering. Subsequent to the offering,
the Company issued an aggregate of 1,335,000 warrants to certain individuals of
the investment group (including the new Board of Directors members) as
additional compensation for services provided in connection with the offering
and in consideration for them providing personal guarantees of the Company's
existing indebtedness to Bank One in the amount of $750,000. Each warrant is
exercisable to purchase one share of the Company's common stock at an exercise
price of 110% of the closing bid price of a share of common stock of the Company
as quoted on the NASDAQ Bulletin Board on the day of such grant.
In September 1996, the Company deposited a portion of the proceeds received
from the equity placement in the amount of $400,000 with Bank One, Cleveland,
the Company's principal bank lender, as additional collateral to secure the
repayment of the debt more fully-described in Note 4.
F-49
<PAGE>
To the Board of Directors and Stockholders
of M.I.E. Hospitality, Inc.
Report of Independent Auditors
We have audited the accompanying balance sheet of M.I.E. Hospitality, Inc.
(a wholly-owned subsidiary of Arthur Treacher's, Inc. effective as of November
27, 1996) as of December 29, 1996, and the related statements of operations,
stockholder's equity and cash flows for the period January 1, 1996 through
December 29, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of M.I.E. Hospitality, Inc. as
of December 29, 1996, and the results of its operations and its cash flows for
the period January 1, 1996 through December 29, 1996 in conformity with
generally accepted accounting principles.
As more fully discussed in Notes 1 and 6, on November 27, 1996 the
stockholders of M.I.E. Hospitality, Inc. sold their stock to Arthur Treacher's,
Inc. and the Company became a wholly- owned subsidiary of Arthur Treacher's,
Inc. At that time, the Company became ineligible to operate as an S Corporation
and, accordingly, its S Corporation status was terminated as of that date.
/s/Lytkowski & Pease
LYTKOWSKI & PEASE, INC.
March 7, 1997
F-50
<PAGE>
M.I.E. HOSPITALITY, INC.
BALANCE SHEET
DECEMBER 29, 1996
ASSETS
CURRENT ASSETS
Cash and short-term investments $1,003,603
Accounts receivable - related party 91,574
Inventories 136,907
Prepaid expenses 37,525
Note receivable - current 6,195
TOTAL CURRENT ASSETS 1,275,804
OTHER ASSETS
Franchise and organizational fees, net of
accumulated amortization of $105,000 56,294
Deposits 51,563
Note receivable, net of current portion 7,794
Other 61,514
TOTAL OTHER ASSETS 177,165
PROPERTY AND EQUIPMENT, at cost
Land 135,252
Buildings 117,349
Furniture, fixtures, equipment and improvements 6,498,992
TOTAL PROPERTY AND EQUIPMENT 6,751,593
Less - accumulated depreciation 3,503,803
NET PROPERTY AND EQUIPMENT 3,247,790
$4,700,759
F-51
<PAGE>
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable $ 109,037
Accrued expenses and taxes withheld 338,857
Income taxes due to parent 118,172
TOTAL CURRENT LIABILITIES 566,066
LONG-TERM DEBT - RELATED PARTY 1,139,563
DEFERRED TAXES 723,999
STOCKHOLDER'S EQUITY
Common stock, voting 1
Common stock, non-voting 8,212
Paid-in-capital 670,752
Retained earnings 1,750,132
Treasury stock, at cost (157,966)
TOTAL STOCKHOLDER'S EQUITY 2,271,131
$4,700,759
See notes to financial statements.
F-52
<PAGE>
M.I.E. HOSPITALITY, INC.
STATEMENT OF OPERATIONS
FOR THE PERIOD JANUARY 1, 1996 THROUGH DECEMBER 29, 1996
REVENUE
Restaurant sales $14,399,959
COSTS AND EXPENSES
Cost of sales 12,225,180
General and administrative 1,529,105
TOTAL COSTS AND EXPENSES 13,754,285
INCOME FROM OPERATIONS 645,674
OTHER INCOME (EXPENSE)
Interest expense (205,470)
Loss on store closings (162,686)
Gain on sale of investments 370,000
TOTAL OTHER INCOME 1,844
INCOME BEFORE DEPRECIATION, AMORTIZATION
AND INCOME TAXES 647,518
DEPRECIATION AND AMORTIZATION 638,096
INCOME BEFORE INCOME TAXES 9,422
INCOME TAX EXPENSE
Current 118,172
Deferred 723,999
TOTAL INCOME TAXES 842,171
NET LOSS $ (832,749)
NET LOSS PER COMMON SHARE $ (1.07)
AVERAGE SHARES OUTSTANDING 780,164
See notes to financial statements.
F-53
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
M.I.E. HOSPITALITY, INC.
STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE PERIOD JANUARY 1, 1996 THROUGH DECEMBER 29, 1996
Common Stock Common Stock
Voting Non-Voting Paid-in Retained Treasury Stock
Shares Amount Shares Amount Capital Earnings Shares Amount Total
BALANCE -- JANUARY 1, 1996 11.65 $1 821,214.26 $8,212 $52,315 $ 2,582,881 41,062 $(157,966) $ 2,485,443
Capital Contribution 618,437 618,437
Net loss _____ (832,749) (832,749)
BALANCE -- DECEMBER 29, 1996 11.65 $1 821,214.26 $8,212 $670,752 $ 1,750,132 41,062 $(157,966) $ 2,271,131
</TABLE>
See notes to financial statements.
F-54
<PAGE>
M.I.E. HOSPITALITY, INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD JANUARY 1, 1996 THROUGH DECEMBER 29, 1996
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (832,749)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 638,096
Loss on sale of property and equipment 162,686
Gain on sale of investments (370,000)
Deferred federal income tax expense 723,999
Changes in operating assets and liabilities:
Accounts receivable (90,699)
Notes receivable 5,727
Prepaid expenses and other assets 27,469
Inventories 20,880
Accounts payable (222,365)
Accrued expenses and other liabilities 109,347
Income taxes due to parent 118,172
TOTAL ADJUSTMENTS 1,123,312
NET CASH PROVIDED BY OPERATING
ACTIVITIES 290,563
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposal of property and equipment (35,091)
Purchase of property and equipment (186,961)
NET CASH USED IN INVESTING ACTIVITIES (151,870)
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contribution 618,437
Borrowings on note payable 238,000
Principal payments on long-term debt (743,437)
NET CASH PROVIDED BY FINANCING ACTIVITIES 113,000
NET CHANGE IN CASH AND SHORT-TERM
INVESTMENTS 251,693
Cash at beginning of period 751,910
CASH AND SHORT-TERM INVESTMENTS AT
END OF PERIOD $1,003,603
See notes to financial statements.
F-55
<PAGE>
M.I.E. HOSPITALITY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 29, 1996
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of the business: M.I.E. Hospitality, Inc. (the "Company") owns
and operates thirty-two Arthur Treacher's Fish & Chips restaurants in
Pennsylvania, New York, Delaware and New Jersey.
Prior to November 27, 1996, the Company was owned by certain individual
stockholders. On November 27, 1996, the stockholders sold their stock in the
Company to Arthur Treacher's, Inc. ("Arthur Treacher's") at which time the
Company became a wholly-owned subsidiary of Arthur Treacher's. Because Arthur
Treacher's is not an eligible S Corporation stockholder under Internal Revenue
Service regulations, the Company's S election was terminated at date of the
acquisition.
Property and equipment: Property and equipment is stated at cost.
Maintenance and repairs are charged to expense while expenditures for renewals
which prolong the lives of the assets are capitalized.
Depreciation is computed utilizing the straight-line method over the
estimated useful lives of the various assets. Leasehold improvements are
amortized by the straight-line method over the shorter of their estimated useful
lives or the term of the lease. Depreciation and amortization periods range from
7-10 years for leasehold improvements and 3-10 years for equipment.
Depreciation and amortization expense totaled $638,096 for the period
January 1, 1996 through December 29, 1996.
Cash and cash equivalents: Cash and cash equivalents include cash and
short-term investments with original maturities of three months or less and
consistent of checking accounts and a repurchase agreement with a local
commercial bank as described below.
At December 29, 1996, the Company had cash balances on deposit with a
commercial bank which exceeded the federally-insured deposit limit by
approximately $6,000.
At December 29, 1996, cash and short-term investments include an overnight
repurchase agreement with a commercial bank in the amount of $401,000. The
agreement is collateralized by FNMA securities held by the bank with a fair
market value of $401,000.
Inventories: Inventories, which consist primarily of food located in the
restaurants, are stated at the lower of cost (first-in, first-out method) or
market.
Other assets: Other assets consists of $61,514 of restaurant equipment
purchased but not yet placed in service.
Income taxes: Effective November 27, 1996, the Company's S election was
terminated and it became a taxable corporation. As an S Corporation its earnings
and losses were included in the personal tax returns of the stockholders, and
the Company did not record an income tax provision. Effective with the change,
income taxes have been provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the basis of
F-56
<PAGE>
property and equipment for financial and income tax reporting. The deferred
taxes represent the future tax return consequences of those differences, which
will either be taxable or deductible when the assets and liabilities are
recovered or settled.
Net loss per common share: The computation of loss per common share is
based on average shares outstanding during the period January 1, 1996 through
December 29, 1996.
Franchise and organizational fees: Franchise and organizational fees
represent the cost of the rights to own and operate the Arthur Treacher's Fish &
Chips restaurants. These costs are being amortized using the straight-line
method over 20 years.
Use of estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
NOTE 2 -- RELATED PARTY RECEIVABLE
Accounts receivable - related party at December 29, 1996 consists of
amounts due from Magee Industrial Enterprises, Inc. ("Magee"), an entity owned
by the former stockholders of the Company.
NOTE 3 -- LONG-TERM DEBT
Long-term debt represents a note payable to Magee, a company owned by the
former stockholders of the Company, in the amount of $1,139,563. The note is
payable in ten equal semi-annual installments with the first payment due in June
1998. The note bears interest at a fixed rate of 8% which is payable in June and
December of each year.
The note contains certain provisions requiring an acceleration of the
repayment in the event the Company, or the new stockholder, obtains certain
additional debt or equity financing, or the assets of the Company are sold.
Current maturities of the debt are as follows:
Year Ending December 31, Amount
1998 $ 227,913
1999 227,913
2000 227,913
2001 227,913
Thereafter 227,911
Total long-term debt $1,139,563
Interest paid for the period January 1, 1996 through December 29, 1996
totaled $197,900.
Based on current borrowing rates, the fair value of the above note payable
approximates its carrying amount.
F-57
<PAGE>
NOTE 4 -- LEASES
The Company is obligated under long-term operating lease arrangements for
its restaurants, and certain leasehold improvements, with remaining terms
ranging from 1 to 16 years. In addition, many of the leases contain renewal
options for periods of 5-20 years.
Most of the leases are net leases under which the Company pays the taxes,
insurance, utilities, and maintenance costs. Certain leases provide for
additional annual rent based upon total gross revenues and increases in the
Consumer Price Index.
Rent expense for all operating leases, including leases with terms of less
than one year, amounted to $2,435,000 for the period January 1, 1996 through
December 29, 1996.
Future minimum lease payments under operating leases having remaining
noncancellable lease terms in excess of one year are as follows:
Year Ending December 31, Amount
1997 $1,270,600
1998 1,240,200
1999 1,210,600
2000 1,220,200
2001 1,073,000
Thereafter 2,104,400
Total minimum lease payments $8,119,000
NOTE 5 -- GAIN ON SALE OF INVESTMENTS
In connection with the sale of the Company's common stock by the
stockholders to Arthur Treacher's, the Company sold Arthur Treacher's non-voting
preferred stock it owned to Magee. The preferred stock, which was being carried
at its cost of $490,000, was sold to Magee at management's estimate of its fair
market value at that time of $860,000. The gain of $370,000 is reflected as
other income in the accompanying financial statements. Proceeds due from the
sale were used to repay existing related party debt.
NOTE 6 -- STOCKHOLDER'S EQUITY
The following is a summary of stockholder's equity at December 29,1996:
Voting common stock, par value $0.01 per
share, authorized 12 shares; issued and
outstanding 11.65 shares $ 1
Non-voting common stock, par value $0.01
per share, authorized 850,000 shares;
issued: 821,214.26 shares; outstanding:
780,152.26 shares, net of 41,062
shares held in treasury 8,212
Paid-in-capital 670,752
F-58
<PAGE>
Retained earnings 1,750,132
Treasury stock, at cost (157,966)
$2,271,131
NOTE 7 -- INCOME TAXES
The reconciliation between income tax expense and a theoretical
federal tax computed by applying a rate of 34% is as follows:
Federal income tax rate of 34%
applied to book income before
income taxes earned as a
C-Corporation of $352,600 $ 119,884
Permanent differences between tax and
book basis 160
Recognition of prior periods deferred
tax liabilities upon termination of
S-Corporation status 722,127
Income Tax Expense $842,171
The provision for income taxes consists of the following:
Current
Federal $118,172
Deferred
Federal 723,999
$842,171
Deferred income taxes result from timing differences in the recognition of
revenue and expense for book and tax purposes, primarily from the tax timing
differences of accelerated depreciation.
Prior to November 27, 1996, the Company was an S Corporation. Upon its
acquisition by Arthur Treacher's, which is not an eligible S Corporation
stockholder, the Company's S Corporation status was terminated and it became a
taxable corporation. At that time, the Company recognized a net deferred tax
liability of approximately $723,000 with a corresponding charge to deferred tax
expense in the statement of operations.
The Company's taxable income for the period from acquisition through
December 29, 1996 will be included in the consolidated tax return filed by
Arthur Treacher's. Income tax expense of $120,000 has been computed based upon
income recognized for financial reporting purposes based upon the taxes the
Company would be required to pay if the Company would file a separate federal
tax return. The estimated income tax payable was computed using a statutory rate
of 34%. At December 29, 1996, taxes currently payable of $118,172 have been
reflected as income taxes due to parent in the accompanying financial statement.
No income taxes were paid for the period January 1, 1996 through
December 29, 1996.
Deferred income taxes reflect the net tax effects of temporary deifferences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax
F-59
<PAGE>
purposes. Significant components of the Company's deferred tax liabilities and
assets as of December 29, 1996 are as follows:
Deferred tax liabilities:
Depreciation $812,062
Amoritization 31,265
Total deferred tax liabilities 843,327
Deferred tax assets:
Fixed asset basis 94,878
Franchise and organizational cost basis 24,450
Total deferred tax assets 119,328
Net deferred tax liabilities $723,999
NOTE 8 -- CHANGE IN OWNERSHIP
On November 27, 1996, Arthur Treacher's purchased 100% of the outstanding
common stock of the Company. In connection with the purchase, in December 1996,
Arthur Treacher's contributed $618,437 as an equity investment for the purpose
of reducing the related party payable to Magee.
NOTE 9 -- RELATED PARTY FEES
In connection with the operation of its stores, the Company pays a royalty
to Arthur Treacher's. Royalty expense for the period January 1, 1996 through
November 27, 1996 totaled $254,180. Beginning November 27, 1996, Arthur
Treacher's no longer charged the Company a royalty fee.
NOTE 10 -- RELATED PARTY FEES
In connection with the operation of its stores, the Company pays a royalty
to Arthur Treacher's. Royalty expense for the period January 1, 1996 through
December 29, 1996 totaled $254,180. Royalty expense for the period January 1,
1995 through December 31, 1995 totaled $347,849.
F-60
<PAGE>
MIE HOSPITALITY INC.
BALANCE SHEETS
FOR YEARS ENDING
DECEMBER 29, 1996 and DECEMBER 31, 1995
ASSETS
1996 1995
(audited) (unaudited)
CURRENT ASSETS
Cash and short-term investments $1,003,603 $751,910
Deposits held in escrow
Accounts receivable, net of allowance
for doubtful accounts 91,574 875
Inventories 136,907 157,787
Prepaid Expenses 37,525 114,721
Note receivable - current portion 6,195 5,777
TOTAL CURRENT ASSETS 1,275,804 1,031,070
OTHER ASSETS
Investments 490,000
Security deposits 51,563
Franchise and organizational fees 56,294 65,294
Note receivable net of current portion 7,794 13,989
Other 61,514 63,350
TOTAL OTHER ASSETS 177,165 632,633
PROPERTY AND EQUIPMENT, at cost
Land 135,252 135,252
Buildings 117,349 117,349
Equipment and Leasehold improvements 6,498,992 6,826,090
TOTAL PROPERTY AND EQUIPMENT 6,751,593 7,078,691
Less - accumulated depreciation 3,503,803 3,190,989
NET PROPERTY AND EQUIPMENT 3,247,790 3,887,702
$4,700,759 $5,551,405
F- 62
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
1996 1995
( audited ) ( unaudited )
CURRENT LIABILITIES
Notes payable due to parent $2,505,000
Accounts payable $109,037 331,402
Accrued expenses and taxes withheld 338,857 164,299
Current maturities of long-term debt
Income taxes due to parent 118,172 65,261
TOTAL CURRENT LIABILITIES 566,066 3,065,962
LONG-TERM DEBT, net of current portion 1,139,563
DEFERRED FEDERAL INCOME TAX 723,999
STOCKHOLDERS' EQUITY
Common Stock, voting 1 1
Common Stock 8,212 8,212
Paid-in-capital 670,752 52,315
Retained earnings 1,750,132 2,582,881
Treasury Stock, at cost (157,966) (157,966)
TOTAL STOCKHOLDERS' EQUITY 2,271,131 2,485,443
$4,700,759 $5,551,405
F- 63
<PAGE>
MIE HOSPITALITY, INC.
STATEMENTS OF OPERATIONS
FOR YEARS ENDING
DECEMBER 29, 1996 and DECEMBER 31, 1995
1996 1995
(AUDITED) (UNAUDITED)
REVENUE
Sales $14,399,959 $15,235,471
TOTAL REVENUE 14,399,959 15,235,471
COST OF SALES and EXPENSES
Cost of Sales and Operating Expenses 12,225,180 13,638,107
General and Administrative 1,529,105 847,955
Depreciation and Amortization 638,096 641,065
TOTAL COST and EXPENSES 14,392,381 15,127,127
NET (LOSS) FROM OPERATIONS 7,578 108,344
OTHER INCOME (EXPENSE)
Interest Expense (205,470) (434,938)
Loss on Sale (162,686)
Other - net 370,000 221,564
TOTAL OTHER INCOME (EXPENSE) 1,844 (213,374)
NET PROFIT (LOSS) BEFORE TAXES $ 9,422 $ (105,030)
INCOME TAX BENEFIT
Current 118,172
Deferred 723,999
TOTAL INCOME TAX BENEFIT 842,171
NET LOSS $(832,749) $(105,030)
NET LOSS PER COMMON SHARE ($1.07) ($0.13)
AVERAGE SHARES OUTSTANDING 780,164 793,851
F- 64
<PAGE>
M.I.E. HOSPITALITY, INC.
STATEMENT OF RETAINED EARNINGS (DEFICIT)
FOR THE YEARS ENDED DECEMBER 29, 1996 AND DECEMBER 29, 1995
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Common Stock Common Stock
Voting Non-Voting Paid-in Retained Treasury Stock
Shares Amount Shares Amount Capital Earnings Shares Amount Total
BALANCE-
January 1, 1995 11.65 $ 1 821,214 $ 8,212 $ 52,315 $ 2,687,911 $2,748,439
Repurchase treasury
stock 41,062 $(157,966) $(157,966)
Net loss (105,030) (105,038)
BALANCE -- DECEMBER 31,1995 11.65 $1 821,214.26 $8,212 $52,315 $ 2,582,881 41,062 $(157,966) $2,485,443
Capital Contribution 618,437 618,437
Net loss (832,749) (832,749)
BALANCE -- DECEMBER 29, 1996 11.65 $1 821,214.26 $8,212 $670,752 $ 1,750,132 41,062 (157,966) $ 2,271,131
</TABLE>
F- 65
<PAGE>
M.I.E. HOSPITALITY
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 29, 1996 and DECEMBER 31, 1995
1996 1995
(AUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss
(832,749) $(105,030)
Adjustments to reconcile net loss to
net cash
used in operating activities :
Depreciation and amortization 638,096 601,351
Loss (gain) on sale of property
and equipment 162,686
Gain on sale of investments (370,000)
Deferred federal income tax benefit 723,999
Changes in operating assets and
liabilities :
Accounts receivable (90,699) 29,475
Notes receivable 5,727 7,438
Prepaid expenses and other assets 27,469 (65,993)
Inventories 20,880 (6,148)
Accounts payable (222,365) (41,844)
Accrued expenses and other liabilities 109,347 (73,009)
Income taxes due to parent 118,172
TOTAL ADJUSTMENTS 1,123,312 451,270
NET CASH ( USED IN ) PROVIDED BY
OPERATING ACTIVITIES 290,563 346,240
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds fromdisposal of property and equipment 35,091
Purchase of subsidiary (186,961) (102,494)
NET CASH USED IN INVESTING ACTIVITIES (151,870) (102,494)
CASH FLOWS FROM FINANCING ACTIVITIES
Capital
contribution 618,437
Borowwings on note payable 238,000 405,000
Principal payments on long term debt (743,437)
Purchase of treasury stock (157,966)
NET CASH PROVIDED BY FINANCING ACTIVITIES 113,000 247,034
NET CHANGE IN CASH AND SHORT TERM INVESTMENTS 251,693 490,780
Cash and short term investments at
beginning of periods 751,910 261,130
CASH AND SHORT TERM INVESTMENTS AT
END OF PERIODS $1,003,603 $751,910
F-66
<PAGE>
M.I.E. HOSPITALITY, INC.
NOTES TO FINANCIAL STATEMENTS
FOR YEARS ENDED
DECEMBER 29, 1996 (AUDITED) AND DECEMBER 31, 1995(UNAUDITED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of the business: M.I.E. Hospitality, Inc. (the "Company") owns
and operates thirty-two Arthur Treacher's Fish & Chips restaurants in
Pennsylvania, New York, Delaware and New Jersey. Prior to November 27, 1996, the
Company was owned by certain individual stockholders. On November 27, 1996, the
stockholders sold their stock in the Company to Arthur Treacher's, Inc. ("Arthur
Treacher's") at which time the Company became a wholly-owned subsidiary of
Arthur Treacher's. Because Arthur Treacher's is not an eligible S Corporation
stockholder under Internal Revenue Service regulations, the Company's S election
was terminated at date of the acquisition.
Property and equipment: Property and equipment is stated at cost.
Maintenance and repairs are charged to expense while expenditures for renewals
which prolong the lives of the assets are capitalized.
Depreciation is computed utilizing the straight-line method over the
estimated useful lives of the various assets. Leasehold improvements are
amortized by the straight-line method over the shorter of their estimated useful
lives or the term of the lease. Depreciation and amortization periods range from
7-10 years for leasehold improvements and 3-10 years for equipment.
Depreciation and amortization expense totaled $638,096 for the period
January 1, 1996 through December 29, 1996 and $641,065 for the year ended
December 31, 1995.
Cash and cash equivalents: Cash and cash equivalents include cash and
short-term investments with original maturities of three months or less and
consistent of checking accounts and a repurchase agreement with a local
commercial bank as described below.
The Company had cash balances on deposit with a commercial bank which
exceeded the federally- insured deposit limit by approximately $6,000 and
$262,000 for years ended December 29, 1996 and December 31, 1995, respectively.
At December 29, 1996, cash and short-term investments include an overnight
repurchase agreement with a commercial bank in the amount of $401,000. The
agreement is collateralized by FNMA securities held by the bank with a fair
market value of $401,000.
Inventories: Inventories, which consist primarily of food located in the
restaurants, are stated at the lower of cost (first-in, first-out method) or
market.
Other assets: Other assets consists of $61,514 and $63,350 of restaurant
equipment purchased but not yet placed in service for year ended December 29,
1996 and December 31, 1995, respectively.
Income taxes: Effective November 27, 1996, the Company's S election was
terminated and it became a
F-67
<PAGE>
taxable corporation. As an S Corporation its earnings and losses were
included in the personal tax returns of the stockholders, and the Company did
not record an income tax provision. Effective with the change, income taxes have
been provided for the tax effects of transactions reported in the financial
statements and consist of taxes currently due plus deferred taxes related
primarily to differences between the basis of property and equipment for
financial and income tax reporting. The deferred taxes represent the future tax
return consequences of those differences, which will either be taxable or
deductible when the assets and liabilities are recovered or settled.
Net loss per common share: The computation of loss per common share is
based on average shares outstanding during the period January 1, 1996 through
December 29, 1996 and January 1, 1995 through December 31, 1996.
Franchise and organizational fees: Franchise and organizational fees
represent the cost of the rights to own and operate the Arthur Treacher's Fish &
Chips restaurants. These costs are being amortized using the straight-line
method over 20 years.
Use of estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
NOTE 2 -- RELATED PARTY RECEIVABLE
Accounts receivable totaled $91,574 and $875 for years ended December 29,
1996 and December 31, 1995, respectively.
NOTE 3 -- NOTE PAYABLE DUE TO PARENT
The note payable due to the parent company represents a demand note in the
amount of $2,505,000 bearing no interest and payable to Magee
Industrial Enterprises, Inc., the parent company.
NOTE 4 -- LONG-TERM DEBT
Long-term debt represents a note payable to Magee, a company owned by the
former stockholders of the Company, in the amount of $1,139,563. The note is
payable in ten equal semi-annual installments with the first payment due in June
1998. The note bears interest at a fixed rate of 8% which is payable in June and
December of each year.
The note contains certain provisions requiring an acceleration of the
repayment in the event the Company, or the new stockholder, obtains certain
additional debt or equity financing, or the assets of the Company are sold.
F-68
<PAGE>
Current maturities of the debt are as follows:
Year Ending December 31, Amount
1998 $ 227,913
1999 227,913
2000 227,913
2001 227,913
Thereafter 227,911
Total long-term debt $1,139,563
Interest expense was $205,470 and $434,938 for years ended December 29,
1996 and December 31, 1995, respectively.
Based on current borrowing rates, the fair value of the above note payable
approximates its carrying amount.
NOTE 5 -- LEASES
The Company is obligated under long-term operating lease arrangements for
its restaurants, and certain leasehold improvements, with remaining terms
ranging from 1 to 16 years. In addition, many of the leases contain renewal
options for periods of 5-20 years.
Most of the leases are net leases under which the Company pays the taxes,
insurance, utilities, and maintenance costs. Certain leases provide for
additional annual rent based upon total gross revenues and increases in the
Consumer Price Index.
Rent expense for all operating leases, including leases with terms of less
than one year, amounted to $2,435,000 and $2,410,807 for the years ended
December 29, 1996 and December 31, 1995, respectively.
Future minimum lease payments under operating leases having remaining
noncancellable lease terms in excess of one year are as follows:
Year Ending December 31, Amount
1997 $1,270,600
1998 1,240,200
1999 1,210,600
2000 1,220,200
2001 1,073,000
Thereafter 2,104,400
Total minimum lease payments $8,119,000
F-69
<PAGE>
NOTE 6 -- GAIN ON SALE OF INVESTMENTS
In connection with the sale of the Company's common stock by the
stockholders to Arthur Treacher's, the Company sold Arthur Treacher's non-voting
preferred stock it owned to Magee. The preferred stock, which was being carried
at its cost of $490,000, was sold to Magee at management's estimate of its fair
market value at that time of $860,000. The gain of $370,000 is reflected as
other income in the accompanying financial statements. Proceeds due from the
sale were used to repay existing related party debt.
NOTE 7 -- STOCKHOLDER'S EQUITY
The following is a summary of stockholder's equity at December 29, 1996 and
December 31, 1995:
1996 1995
Voting common stock, par value $0.01 per
share, authorized 12 shares; issued and
outstanding 11.65 shares $ 1 $ 1
Non-voting common stock, par value $0.01
per share, authorized 850,000 shares;
issued: 821,214.26 shares; outstanding:
780,152.26 shares, net of 41,062
shares held in treasury 8,212 8,212
Paid-in-capital 670,752 52,315
Retained earnings 1,750,132 2,582,881
Treasury stock, at cost (157,966) (157,966)
$2,271,131 $2,485,443
In May 1995 the Company repurchased 41,062 shares of Treasury stock.
NOTE 8 -- INCOME TAXES
The reconciliation between income tax expense and a theoretical federal tax
computed by applying a rate of 34% is as follows:
Federal income tax rate of 34%
applied to book income before
income taxes earned as a
C-Corporation of $352,600 $ 119,884
Permanent differences between tax and
book basis 160
Recognition of prior periods deferred
tax liabilities upon termination of
F-70
<PAGE>
TABLE--CONTINUED
S-Corporation status 722,127
Income Tax Expense $842,171
The provision for income taxes consists of the following:
Current
Federal $118,172
Deferred
Federal 723,999
$842,171
Deferred income taxes result from timing differences in the recognition of
revenue and expense for book and tax purposes, primarily from the tax timing
differences of accelerated depreciation.
Prior to November 27, 1996, the Company was an S Corporation. Upon its
acquisition by Arthur Treacher's, which is not an eligible S Corporation
stockholder, the Company's S Corporation status was terminated and it became a
taxable corporation. At that time, the Company recognized a net deferred tax
liability of approximately $723,000 with a corresponding charge to deferred tax
expense in the statement of operations.
The Company's taxable income for the period from acquisition through
December 29, 1996 will be included in the consolidated tax return filed by
Arthur Treacher's. Income tax expense of $120,000 has been computed based upon
income recognized for financial reporting purposes based upon the taxes the
Company would be required to pay if the Company would file a separate federal
tax return. The estimated income tax payable was computed using a statutory rate
of 34%. At December 29, 1996, taxes currently payable of $118,172 have been
reflected as income taxes due to parent in the accompanying financial statement.
No income taxes were paid for the period January 1, 1996 through December
29, 1996.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets as of December 29, 1996 are as
follows:
Deferred tax liabilities:
Depreciation $812,062
Amortization 31,265
Total deferred tax liabilities 843,327
Deferred tax assets:
Fixed asset basis 94,878
Franchise and organizational cost basis 24,450
F-71
<PAGE>
Total deferred tax assets 119,328
Net deferred tax liabilities $723,999
NOTE 9 -- CHANGE IN OWNERSHIP
On November 27, 1996, Arthur Treacher's purchased 100% of the outstanding
common stock of the Company. In connection with the purchase, in December 1996,
Arthur Treacher's contributed $618,437 as an equity investment for the purpose
of reducing the related party payable to Magee.
NOTE 10 -- RELATED PARTY FEES
In connection with the operation of its stores, the Company pays a royalty
to Arthur Treacher's. Royalty expense for the period January 1, 1996 through
December 29, 1996 totaled $254,180. Royalty expense for the period January 1,
1995 through December 31, 1995 totaled $347,849.
F-72
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Nine Months Ended March 30, 1997
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-Mos
<FISCAL-YEAR-END> Mar-30-1997
<PERIOD-START> Jul-01-1996
<PERIOD-END> Mar-30-1997
<CASH> 1,746,658
<SECURITIES> 0
<RECEIVABLES> 169,614
<ALLOWANCES> 0
<INVENTORY> 290,552
<CURRENT-ASSETS> 2,507,086
<PP&E> 6,933,615
<DEPRECIATION> 1,811,104
<TOTAL-ASSETS> 8,490,424
<CURRENT-LIABILITIES> 2,253,619
<BONDS> 1,501,270
0
577,800
<COMMON> 143,646
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 7,785,662
<SALES> 10,709,831
<TOTAL-REVENUES> 11,533,846
<CGS> 3,843,818
<TOTAL-COSTS> 11,947,913
<OTHER-EXPENSES> 719,196
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 117,688
<INCOME-PRETAX> (1,138,883)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,138,883)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,138,883)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-Mos
<FISCAL-YEAR-END> Jun-30-1996
<PERIOD-START> Jul-01-1995
<PERIOD-END> Jun-30-1996
<CASH> 990,683
<SECURITIES> 0
<RECEIVABLES> 147,122
<ALLOWANCES> 0
<INVENTORY> 68,668
<CURRENT-ASSETS> 1,241,340
<PP&E> 2,814,771
<DEPRECIATION> 1,424,317
<TOTAL-ASSETS> 2,999,404
<CURRENT-LIABILITIES> 2,494,136
<BONDS> 458,923
0
577,800
<COMMON> 111,186
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2,999,404
<SALES> 6,648,564
<TOTAL-REVENUES> 7,877,210
<CGS> 3,956,776
<TOTAL-COSTS> 8,165,233
<OTHER-EXPENSES> 866,817
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 168,513
<INCOME-PRETAX> (1,154,240)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,154,340)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,154,340)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> 0
</TABLE>
